What is Loan-to-Value Ratio (LTV)?
Category: Definitions
The Loan-to-Value (LTV) ratio is an assessment of lending risk that financial institutions examine before approving a mortgage.
How to Calculate LTV
LTV is calculated by dividing the amount borrowed by the appraised value or purchase price of the property (whichever is lower):
LTV = (Mortgage Amount / Property Value) × 100
If you buy a $300,000 home with a $60,000 down payment, your mortgage is $240,000. Your LTV is ($240,000 / $300,000) = 80%.
Why LTV Matters
- Mortgage Insurance: A higher LTV (often above 80%) typically requires you to pay Private Mortgage Insurance (PMI).
- Interest Rates: Lower LTV ratios represent lower risk for lenders, which often translates to more favorable interest rates.
- Refinancing: When refinancing, you generally need an LTV below a certain threshold (often 80%) to get the best terms or to cash out equity. Compare LTV implications in the Refinance Calculator.