LTV (Loan-to-Value) Calculator
What is Loan-to-Value (LTV)?
The Loan-to-Value (LTV) ratio is a critical financial metric used by lenders, particularly in mortgage lending, to assess the risk of a loan. It represents the relationship between the amount of the loan and the total appraised value of the asset being purchased or used as collateral.
How to Calculate LTV
The formula for LTV is straightforward: divide the total loan amount by the appraised property value, then multiply by 100 to get a percentage. For example, if you are buying a home worth $500,000 and taking out a loan for $400,000, your LTV is 80% ($400,000 / $500,000 = 0.80).
Why LTV Matters to Borrowers
- Mortgage Rates: Lower LTV ratios usually result in lower interest rates because the lender perceives less risk.
- PMI Requirements: In the United States, if your LTV is higher than 80% on a conventional loan, you are typically required to pay Private Mortgage Insurance (PMI).
- Loan Approval: Most lenders have maximum LTV limits. If your LTV is too high, you may need a larger down payment to qualify.
- Refinancing: To refinance a mortgage, lenders often look for an LTV of 80% or lower to provide the most favorable terms.
Real-World Example
Imagine you want to buy a house for $400,000. You have saved $40,000 for a down payment. This means you need to borrow $360,000.
Using the LTV calculation: ($360,000 ÷ $400,000) × 100 = 90%.
In this scenario, because your LTV is 90%, you would likely be approved for the loan but would need to pay monthly PMI until your equity reaches 20% (bringing the LTV down to 80%).
How to Lower Your LTV Ratio
If your calculated LTV is too high, you have two primary options to lower it:
- Increase your down payment: Providing more cash upfront reduces the loan amount.
- Find a lower-priced property: Buying a less expensive home while keeping the same down payment amount will automatically lower the LTV ratio.