What is loan to value (LTV)
What is Loan to Value (LTV) and Why it Matters
When it comes to buying a home, one of the most important acronyms you’re going to encounter is Loan to Value (LTV). Let’s review what LTV is, why it matters, and what it can mean for your future home purchase.
An LTV is a ratio that is calculated by dividing the amount being borrowed by the appraised value of the home. This percentage helps determine how much of a loan you would need when compared with the value of the property, minus how much you plan to provide as a down payment. Essentially, it helps determine the amount of money a lender will be willing to give you minus the down payment.
You don’t need a math degree to calculate an LTV ratio. For a purchase, simply take what the house is worth (it’s appraised value) and divide that number by the amount being financed, minus your down payment.
For example: imagine you plan to borrow money for a $400,000 home with a 5% down payment of $20,000. Subtracting the $20,000 from $400,000 would give you $380,000. Divide that number by the total appraised value to get an LTV ratio of .95 (95%). Depending on the lender, you might need to increase your down payment to meet their LTV guidelines.
The Ratio Matters to Your Bottom Line
For a lender, the LTV is an insurance policy of sorts. If you do not pay off your loan, it allows the lender to sell your property for less than it is worth, thus recouping some of the costs.
For you, the LTV helps you avoid mortgage insurance, which is required by most mortgage lenders when the LTV is above 80%. Plus, if you ever apply for an equity line of credit, you’ll have more equity available to borrow with a lower LTV ratio.