Loan to Value (LTV) Ratio Calculator
Calculate the Loan to Value ratio for your mortgage or refinance.
Understanding Loan to Value (LTV) Ratio
The Loan to Value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It is commonly used when evaluating mortgage applications, home equity loans, and refinancing scenarios.
How is LTV Calculated?
The formula for LTV is straightforward:
LTV = (Loan Amount / Appraised Property Value) * 100
The LTV is expressed as a percentage.
Why is LTV Important?
Lenders use the LTV ratio to assess the risk associated with a particular loan. A higher LTV ratio indicates a higher risk for the lender because the borrower has less equity in the property. Conversely, a lower LTV ratio suggests lower risk.
- Lower LTV: Generally indicates a lower risk for the lender. This can sometimes lead to better interest rates and loan terms for the borrower. Borrowers with a lower LTV have more equity in their home.
- Higher LTV: Indicates a higher risk for the lender. Loans with high LTV ratios might require private mortgage insurance (PMI) for conventional loans or could be subject to higher interest rates.
LTV and Mortgage Requirements
Different LTV percentages often trigger different requirements and pricing for mortgage loans:
- LTV of 80% or less: This is often considered the benchmark for avoiding PMI on conventional loans.
- LTV above 80%: May require PMI, especially for conforming loans. Lenders may also charge higher interest rates due to the increased risk.
- Jumbo Loans: Loans that exceed conforming loan limits often have specific LTV requirements, sometimes requiring lower LTV ratios than standard loans.
Example Calculation:
Let's say you are looking to buy a home with an appraised value of $300,000 and you plan to take out a mortgage for $240,000.
Using the LTV formula:
LTV = ($240,000 / $300,000) * 100
LTV = 0.80 * 100
LTV = 80%
In this scenario, the LTV is 80%. This typically means you would not need to pay Private Mortgage Insurance (PMI) on a conventional loan.
Consider another example where the same home is appraised at $300,000, but you are only putting down 10% ($30,000), meaning your loan amount is $270,000.
LTV = ($270,000 / $300,000) * 100
LTV = 0.90 * 100
LTV = 90%
With an LTV of 90%, you would likely be required to pay PMI on a conventional mortgage.