The Loan to Value (LTV) ratio is a critical financial metric used primarily in real estate lending and other secured loan scenarios. It compares the amount of a loan to the value of the asset being purchased or used as collateral.
How to Calculate LTV
The formula for calculating LTV is straightforward:
LTV = (Loan Amount / Property Value) * 100
In our calculator:
Loan Amount: This is the total amount of money you are borrowing.
Property Value: This is the appraised value or market value of the asset (e.g., a house) being used as collateral for the loan. Lenders typically use the lower of the appraised value or the purchase price.
Why LTV Matters
Lenders use the LTV ratio to assess the risk associated with a loan. A higher LTV indicates a higher risk for the lender because the borrower has less equity (ownership stake) in the asset. Conversely, a lower LTV means the borrower has more equity, reducing the lender's risk.
Common LTV Thresholds and Their Implications:
80% LTV or lower: This is often the benchmark for avoiding Private Mortgage Insurance (PMI) on conventional home loans. Borrowers with LTVs at or below 80% are generally considered lower risk.
Above 80% LTV: Loans with higher LTVs are seen as riskier. Borrowers may face higher interest rates, require additional documentation, or need to pay PMI to protect the lender.
90% LTV and above: These loans carry the highest risk and may be subject to stricter lending criteria or higher costs.
Use Cases for LTV
Mortgage Lending: The most common application. It determines down payment requirements and PMI eligibility.
Home Equity Loans/Lines of Credit (HELOCs): Lenders assess LTV to determine how much equity you can borrow against.
Refinancing: LTV influences whether you can qualify for a refinance and the terms you'll receive.
Auto Loans: Similar to mortgages, LTV (often expressed as loan-to-value of the vehicle) affects loan terms and approval.
Example Calculation
Let's say you want to buy a home appraised at $300,000 and you plan to make a down payment of $60,000. The loan amount would be $300,000 – $60,000 = $240,000.