Loan to Value Ratio Calculator: How Much House Can I Afford?

Loan to value determines interest rate, down payment and equity if refinancing

Loan to value graphicWhen you're looking to buy a new home, one of the most important things to know is the loan-to-value ratio. This percentage tells you how much of the home's value is being financed through a mortgage.

If you're not sure how to calculate the loan-to-value ratio, don't worry. We've got a handy calculator that will do it for you. Simply enter the purchase price of the home, the amount of the down payment, and the mortgage interest rate. The calculator will then tell you the loan-to-value ratio.

So what does this number mean? Well, if you're thinking about buying a home, it's important to know that lenders usually don't finance more than 80% of a property's value with a conventional loan.

What is LTV?

Perhaps the easiest way to explain LTV is through an example. We'll assume the purchase of a home for $100,00, and you're going to make a down payment of 20%. To calculate LTV, simply divide the loan amount, in this example, $80,000 by the sales price ($100,000). The result of this calculation is 80% LTV.

Now let's take the same example, and we'll assume the home buyer is only going to make a 10% down payment. The LTV in this example will be 90% LTV. ($90,000 divided by $100,000 = 90%).

Sales Price = $100,000

95% LTV 5% down payment
90% LTV 10%
85% LTV 15%
80%LTV 20%

Is there a good loan-to-value ratio (LTV)?

Young couple who purchased a houseA loan to value ratio (LTV ratio) of 80% is considered a good LTV. Why? LTV of at least 80% allows you to avoid some costs associated with a conventional mortgage loan.

As we will cover later, conventional loans with a LTV ratio greater than 80% require the borrower to pay private mortgage insurance (PMI). Over the course of your loan's life, this additional expense might add tens of thousands of dollars to your monthly mortgage payments.

LTV can be a bit confusing, just keep this in mind, a down payment less than 20% will need private mortgage insurance (PMI).

Why Is Loan to Value So Important?

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Corporation (Freddie Mac) establish guidelines for conventional loans. Fannie Mae and Freddie Mac supply the banks and mortgage bankers with the mortgage money.

After settlement, one of these companies usually buys the loan. The lender receives a commission for the sale and is reimbursed for the loan.

Fannie Mae and Freddie Mac require lenders to follow their lending guidelines. One of their requirements is the 20% down payment.

But most home buyers are unable or unwilling to make a 20% down payment. And that's where the private mortgage insurance companies come in.

What is Private Mortgage Insurance?

Private mortgage insurance (PMI) is a service you must pay to your lender if your down payment is less than 20%. The PMI company guarantees the difference between the down payment and 20%.

For example, you make a 5% down payment, the PMI company will pay the lender 15% is the loan goes into default. Fannie Mae and Freddie Mac want 20 percent equity in order to purchase a home, and the lender achieves that requirement with your 5 percent down payment and the 15 percent guarantee..

What is the Cost of PMI?

The PMI premium takes into consideration the loan amount, credit score and a few other variables. As the down payment decreases, the PMI premium increases.

The PMI companies offer 4 payment plans, monthly, single premium, split premium and lender paid mortgage insurance. The lender paid option exchanges a higher interest rate for elimination of the PMI cost.

Combined Loan to Value (CLTV)

The Combined Loan to Value (CLTV) frequently pops up with refinance mortgages. The lender adds the 1st and 2nd loan balances and divides the total by the appraised value of the home.

Conventional Loan to Value Ratio Calculator

As you can see, the loan to value ratio plays an important role in determining the size of your mortgage and impacts your monthly mortgage payment.

Loan to value calculator

Simply skip the down payment box to estimate the LTV for a refinancing transaction.

PURCHASE | REFINANCE |

PURCHASE  
Current appraised value
Less down payment
Loan Balance (1st loan)
 
ADDITIONAL LOAN(S)  
Loan Balance (2nd loan)
Loan Balance (3nd loan)
   
Loan to Value
Combined Loan to Value


Conclusion

In conclusion, the loan to value ratio calculator can help you figure out how much house you can afford. With this information, you can confidently search for your dream home. Remember to stay within your budget and be mindful of your other financial responsibilities.