Loan to Value Ratio Calculator

Calculate the loan to value ratio of a loan. This is the ratio of the loan amount to the value of the property.

Loan-to-value ratio
75.0%
Classification
Conventional
Loan amount
$300,000
Property value
$400,000
Loan to value ratio
75.0%
LTV ratio reference
≤ 80%
Conventional (No PMI required)
80% - 90%
High LTV (PMI likely required)
90% - 95%
Very High LTV (PMI required)
95%+
Extremely High LTV (Limited options)

If you've ever wondered how lenders assess risk when you apply for a mortgage, you've come to the right place! We're going to break down the Loan-to-Value (LTV) ratio – what it is, why it matters, and how you can use it to your advantage. Think of it as a key piece of the puzzle when it comes to securing a loan.

Why is LTV ratio important?

The LTV ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased with the loan. In simpler terms, it's the loan amount divided by the appraised value of the property, expressed as a percentage.

  • For Lenders: It helps them assess the risk of lending money. A higher LTV means the lender is taking on more risk because the borrower has less equity in the property.
  • For Borrowers: It affects the interest rate you'll receive and whether you'll need to pay for private mortgage insurance (PMI). A lower LTV can often translate to better loan terms.

How do you calculate LTV?

This is how you calculate your LTV:

LTV=Loan AmountAppraised Property Value×100LTV = \frac{\text{Loan Amount}}{\text{Appraised Property Value}} \times 100

Let's break that down even further:

  1. Determine the Loan Amount: This is the amount of money you're borrowing to purchase the property.
  2. Determine the Appraised Property Value: This is the value of the property as determined by a professional appraiser. Lenders will typically require an appraisal.
  3. Divide the Loan Amount by the Appraised Value: This gives you a decimal.
  4. Multiply by 100: This converts the decimal to a percentage.

Example of calculating LTV

Let's say you're buying a house for $300,000 and you're taking out a mortgage for $240,000.

  1. Loan Amount: $240,000
  2. Appraised Property Value: $300,000
  3. Divide: $240,000 / $300,000 = 0.8
  4. Multiply: 0.8 x 100 = 80%

Therefore, your LTV ratio is 80%.

What is considered a good LTV ratio?

Generally, a lower LTV ratio is considered better. Here's a quick guide:

  • 80% or lower: Typically considered good. You'll likely get better interest rates and may avoid paying PMI.
  • 81% to 90%: Acceptable, but you'll likely pay higher interest rates and PMI.
  • Above 90%: Considered high risk. You'll likely pay the highest interest rates and PMI, and may have difficulty getting approved.

Keep reading to find out how LTV affects your mortgage!

How does LTV affect your mortgage?

Your LTV ratio significantly impacts several aspects of your mortgage:

  1. Interest Rate: Lower LTVs usually qualify for lower interest rates. Lenders see you as less of a risk.
  2. Private Mortgage Insurance (PMI): If your LTV is above 80%, lenders typically require you to pay PMI. This protects the lender if you default on the loan. Once you reach 20% equity (LTV of 80%), you can usually request to have PMI removed.
  3. Loan Approval: A very high LTV might make it harder to get approved for a mortgage in the first place.

How can you improve your LTV?

Improving your LTV before applying for a mortgage can save you money and increase your chances of approval. Here's how:

  1. Increase Your Down Payment: Saving up a larger down payment is the most direct way to lower your LTV.
  2. Negotiate a Lower Purchase Price: If possible, negotiate a lower price on the property. This will reduce the loan amount needed.
  3. Improve the Property: If you're refinancing, improvements that increase the property's appraised value can lower your LTV. However, this requires upfront investment and a new appraisal.
  4. Pay Down Existing Debt: Reducing other debts can improve your overall financial profile, making lenders more comfortable with a slightly higher LTV.

Ltv ratio: a practical example

Imagine two friends, Sarah and Tom, are both buying houses for $250,000.

  • Sarah puts down $50,000 (20% down payment). Her loan amount is $200,000. Her LTV is ($200,000 / $250,000) * 100 = 80%. She likely avoids PMI and gets a good interest rate.
  • Tom only puts down $12,500 (5% down payment). His loan amount is $237,500. His LTV is ($237,500 / $250,000) * 100 = 95%. He'll likely pay PMI and a higher interest rate.

As you can see, Sarah's lower LTV gives her a significant financial advantage.

Are there any downsides to a low LTV?

While a low LTV is generally desirable, there can be potential downsides:

  • Opportunity Cost: Tying up a large amount of cash in a down payment means you have less money available for other investments or expenses.
  • Slower Equity Growth: While you have more equity upfront, your equity growth will be slower since you're borrowing less.

LTV ratio and refinancing

LTV also plays a crucial role in refinancing. If your home's value has increased or you've paid down a significant portion of your mortgage, your LTV may have improved. This could qualify you for a lower interest rate or allow you to eliminate PMI.

Conclusion

Understanding the Loan-to-Value (LTV) ratio is essential for making informed decisions about mortgages and refinancing. By knowing how it's calculated and how it affects your loan terms, you can position yourself for the best possible outcome. Naturally, we encourage you to speak with a financial advisor to discuss your specific situation. Good luck!