LTV (Loan-to-Value) Ratio Calculator
Understanding the Loan-to-Value (LTV) Ratio
The Loan-to-Value (LTV) ratio is a critical financial term used by mortgage lenders to assess the risk of a loan. It compares the amount of the mortgage you are taking out to the appraised value of the property you are buying or refinancing.
How to Calculate LTV
The formula for LTV is straightforward:
LTV Ratio = (Loan Amount / Appraised Property Value) × 100
For example, if you want to purchase a home appraised at $500,000 and you make a down payment of $100,000, your loan amount will be $400,000. Your LTV would be:
- ($400,000 / $500,000) = 0.80
- 0.80 × 100 = 80%
Why the 80% Threshold Matters
In the mortgage industry, 80% is often the magic number. If your LTV is higher than 80%, lenders typically require you to purchase Private Mortgage Insurance (PMI). This insurance protects the lender if you default on your loan, and it adds a monthly cost to your mortgage payment.
| LTV Range | Risk Level | Typical Impact |
|---|---|---|
| 80% or lower | Low Risk | Best interest rates, no PMI required. |
| 81% – 95% | Moderate Risk | PMI required, slightly higher rates. |
| Above 95% | High Risk | Harder to qualify, high PMI costs. |
How to Lower Your LTV Ratio
If your LTV is too high, you have two primary options to lower it:
- Increase your down payment: Paying more upfront reduces the loan amount needed.
- Find a lower-priced home: If you have a fixed amount for a down payment, buying a cheaper property automatically lowers your LTV.
When refinancing, your LTV is lowered if your home's value has increased since you bought it or if you have paid down a significant portion of your principal balance.