William Kimler borrowed $280,000 to buy a home in North Carolina, whose appraised value was $400,000. As a result, he had a lower loan-to-value (LTV) ratio of 70%, and his lender offered him a discount on home loan rates.
LTV ratio is the amount you borrow divided by the value of the home you buy. A lower LTV ratio lessens the lender’s risk as you invest more of your equity in the property. An LTV ratio of less than 80% makes borrowers eligible for discounts on mortgage rates.
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AIM FOR AN LTV RATIO OF LESS THAN 80%
- You can have favorable loan terms and avoid private mortgage insurance (PMI) with a lower LTV ratio.
- An LTV ratio of more than 80% will increase your home loan rates.
- A lower LTV ratio keeps you in a better position to negotiate loan terms.
Calculate Your Loan-to-Value Ratio
Here are the steps through which you can calculate your loan-to-value ratio:
- Get the exact amount of the loan you want.
- Calculate the property’s appraised value.
- Divide the loan amount by the property value, multiply the result by 100, and convert it to a percentage.
LTV Formula = LTV Ratio = (Loan Amount / Property Value) x 100
For example, if you have a loan amount of $180,000 and the appraised value of the property is $200,000, you would calculate your LTV ratio as:
LTV Ratio = ($180,000 / $200,000) x 100 = 90%
In this case, your LTV ratio is 90%, which means the loan amount represents 90% of the property’s value. The remaining 10% would be the equity or down payment.
LTV Ratio vs. CLTV (Combined Loan-To-Value) Ratio
The loan-to-value (LTV) ratio and the combined loan-to-value (CLTV) ratio are both metrics used to assess property values. However, they differ in their specific calculations and purposes:
| LTV Ratio | CLTV Ratio | |
| 1. | The LTV ratio measures the loan amount in relation to the appraised value or purchase price of a property. | The CLTV ratio considers the total loan amount (including multiple loans) against the property’s purchase price. |
| 2. | It is used for individual mortgage loans. | It is applied when the same property serves as the security for more than one loan or lien. |
| 3. | LTV is calculated by dividing the loan amount by the appraised value or purchase price of the property. | CLTV is calculated by dividing the sum of all loan amounts by the appraised value or purchase price. |
| 4. | Lenders use the LTV ratio to evaluate risk and determine loan terms. | Lenders use the CLTV ratio to assess the total debt risk when multiple loans are involved. |
How Do Lenders Use Your LTV Ratio?
Loan-to-value (LTV) ratio is an important factor for lenders to assess loan applications and determine loan terms. Here’s how lenders typically use your LTV ratio:
- Risk Assessment: The LTV ratio helps lenders evaluate the risk associated with the loan. Higher LTV ratios indicate a larger loan amount relative to the property value, which increases the lender’s exposure to potential loss.
- Loan Eligibility: Lenders often establish maximum LTV thresholds for different loan programs. These thresholds define the maximum percentage of the property value that they are willing to lend.
- Mortgage Insurance: The lenders often require borrowers to obtain private mortgage insurance if the LTV ratio is higher. This requirement adds an additional cost to the borrower’s monthly mortgage payments.
- LTV Adjustments: In some cases, lenders may adjust the LTV ratio based on specific factors like the property type, or the borrower’s creditworthiness. These adjustments can impact the loan terms.
What Is a Good LTV Ratio for a Mortgage?
As a general guideline, a lower LTV ratio is considered favorable. Here are some common benchmarks for different mortgage types:
- Conventional Mortgages: A lower LTV ratio is preferable for conventional mortgages. Lenders often look for an LTV ratio of 80% or below. This means the borrower has a minimum of 20% equity in the property.
- Government-Backed Mortgages: These mortgage programs have more flexible LTV requirements. For example, FHA loans may allow borrowers to have an LTV ratio of up to 96.5% with a minimum down payment of 3.5%. VA loans may allow for a 100% LTV ratio, meaning no down payment for eligible veterans and active-duty members.
- Mortgage Refinancing: The lenders often have different LTV requirements when refinancing mortgages. Some lenders may allow higher LTV ratios for refinancing transactions compared to initial purchases. However, a lower LTV ratio can still lead to better refinancing terms with lower interest rates.
How to Lower Your LTV?
There are several ways that could help you lower your LTV ratio:
- Make a Larger Down Payment: A larger down payment when purchasing a property is an effective way to lower your LTV ratio.
- Look for a More Affordable Home: Opt for a property with a lower purchase price. This will reduce the amount you need to borrow and subsequently decrease your LTV ratio.
- Use a Mortgage Calculator: A mortgage calculator will give you an estimate of your loan amount and monthly payments. This will help you understand how much money you need to lower your LTV.
Bottom Line
The LTV ratio is an important measurement metric. It estimates the relationship between the loan amount and the appraised value of a property. A lower LTV ratio generally signifies a lower level of risk for lenders.
It’s advisable to learn to calculate your LTV ratio. You can also implement strategies to lower your LTV to secure better home loan options.
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Frequently Asked Questions
What is a good LTV ratio for a mortgage?
A loan-to-value ratio of less than 80% is considered good for a mortgage.
Why loan to value ratio is important?
The LTV ratio is important for lenders to determine the potential risk they have on a mortgage.
Can I get away with private mortgage insurance with a lower LTV?
Yes, a lower LTV means you have more equity in the home. So the lenders don't need to get insurance on the mortgage payments.
