# Calculate Your Mortgage Loan-to-Value Ratio (LTV)

*Loan to value
determines the interest rate, down payment, and home equity
if refinancing*.

The difference between the amount still owed on your mortgage and the current market value of your home is referred to as the loan-to-value, or LTV.

For example, if you bought a home valued at $200,000 and put down $40,000, your LTV would be 80% ($200,000-$40,000=$160,000).

That $160,000 is the total amount of money you have borrowed. Now, divide $160,000/$200,000=80%.

## What is a Mortgage Loan-to-Value Ratio (LTV)?

The lender will use the mortgage loan-to-value (LTV) ratio to decide how much of a loan you may receive when purchasing a home. It refers to the loan's ratio to the cost of the home. They will calculate it by dividing the loan amount by the house's purchase price. Your LTV ratio will be 80%, for instance, if you want to purchase a home for $100,000 but can only get finance for $80,000. The lender needs to know this figure since it gives them insight into how dangerous the loan is.

## How to Calculate the LTV of a Mortgage

- Calculate the
loan amount: Divide the total purchase price by the down
payment percentage. For example, if the purchase price
is $200,000 and the down payment percentage is 20%, the
loan amount is $160,000.

- Calculate the
loan-to-value ratio: Divide the loan amount by the
purchase price. For example, in the previous example,
the loan-to-value ratio is 80%, or 0.8.
- Calculate the loan-to-value (LTV): Multiply the loan-to-value ratio by 100. The LTV for the example is 80%.

## The Importance of LTV in Mortgage Approval

- Loan-to-value
(LTV) ratio is an essential factor in mortgage approval.
The LTV ratio is a comparison of the amount of the loan
to the value of the property. A high LTV ratio, such as
90% or more, is considered a riskier loan since the
borrower has less equity in the property.

- Lenders use the
LTV ratio to determine the risk associated with a loan.
Generally, a higher LTV ratio indicates a greater risk
of default, while a lower LTV ratio is associated with a
lower risk.

- Lenders use the
LTV ratio to determine the loan amounts they will
approve. The higher the LTV ratio, the lower the loan
amount the lender will likely agree with. For example,
if a lender has a maximum LTV ratio of 80%, they may
only approve a loan for 80% of the property's value.

- The interest
rate and other loan terms are also based on the LTV
ratio. Higher LTV ratios typically come with higher
interest rates, as the lender takes on more risk with
the loan.

- Overall, the LTV ratio is an essential factor in mortgage approval, and it is used to determine the loan's risk, amount, and terms. Lenders must consider the LTV ratio when approving a loan to ensure that the loan is affordable and that the borrower is not taking on more risk than they can handle.

## How LTV Affects Interest Rates and Mortgage Terms

A loan's loan-to-value
ratio, also known as LTV, is a crucial component that plays
a role in determining the interest rate as well as the other
terms of a mortgage. To calculate the loan-to-value (LTV)
ratio, divide the loan amount by the property's estimated
value.

The higher the LTV ratio, the more risk the lender takes on,
and the more likely the borrower is to default. As such,
lenders typically require borrowers with higher LTV ratios
to pay higher interest rates and fees and may also impose
stricter terms and conditions. Lenders may also require
borrowers with higher LTV ratios to purchase private
mortgage insurance (PMI) to protect against potential
losses.

## What is a High LTV Mortgage?

A high LTV mortgage is a loan with a high loan-to-value (LTV) ratio. This means that the borrower has taken out a loan equal to or greater than 80% of the value of the collateral used to secure the loan. High LTV mortgages require the borrower to pay private insurance (PMI).

## What is a Low LTV Mortgage?

A low LTV mortgage is a loan with a loan-to-value (LTV) ratio lower than the industry standard. Generally, lenders require borrowers to have an LTV ratio of 80% or less to qualify for the lowest mortgage rates and most favorable loan terms. Low LTV mortgages allow borrowers to avoid private mortgage insurance and can be beneficial if a borrower is looking to purchase a home with a small down payment.

## How to Improve Your LTV Ratio

- Pay down your
mortgage principal. The most direct way to improve your
can lower your loan-to-value (LTV) ratio is by making
extra payments on your mortgage, and this will reduce
the numerator in the ratio and raise your LTV ratio.

- Increase the
value of your home. Your LTV ratio will be better if you
can raise the value of your house. For example, you can
improve your home to increase its market value, which
will increase the denominator in the ratio and, as a
result, improve your LTV ratio.
- Refinance your
mortgage. Refinancing your mortgage can help you improve
your LTV ratio. When you refinance, you can reduce your
principal amount, reducing the numerator in the ratio
and lowering your LTV ratio. You can also take on a
longer loan term, increasing the denominator in the
ratio and improving your LTV ratio.
- Ask your lender for help. Your lender may have options to help you improve your LTV ratio, and they may be able to offer you a loan modification or other assistance. It's worth it to reach out and see if they can help.

## How LTV Impacts Private Mortgage Insurance (PMI)

LTV, or loan-to-value, is essential in private mortgage insurance (PMI). The higher the LTV, the higher the cost of PMI since lenders view high-LTV mortgages as a greater risk. This is because, with a higher LTV, the borrower has less equity in the home, making the loan more likely to end up in foreclosure, resulting in a more significant loss for the lender. As such, lenders will require more protection, typically in the form of PMI. Conversely, a lower LTV means less risk for the lender, resulting in lower PMI costs.

Conclusion

The loan-to-value (LTV) ratio compares how much you owe on your mortgage to the actual value of your home. Lenders use LTV to assess the risk involved in a loan, the maximum loan amount they will approve, the interest rate, and other loan terms. Generally, a higher LTV ratio denotes a higher default risk, while a lower LTV ratio denotes a lower risk.

Higher LTV ratio borrowers may be subject to stricter terms and conditions and higher interest rates and fees. You can make extra payments to lower your mortgage balance or raise the value of your home to increase your LTV ratio.

SOURCE:

Recommended Reading

What is a Conventional Loan Non-Occupant Co-Borrower?How to Get a Conventional Loan After Chapter 7 Bankruptcy

Find out the credit requirements for a conventional loan.

Calculate Loan Amount From Payment