Loan-to-Value Ratio (LTV)

Understanding Loan-to-Value (LTV)

The loan-to-value (LTV) ratio is a key metric used by lenders to assess the risk associated with a mortgage loan. It represents the ratio of the loan amount to the appraised value of the property being purchased or refinanced.

How LTV is Calculated

The formula is straightforward: LTV = (Loan Amount / Appraised Property Value) * 100.

Key Concepts

• Loan Amount: The total sum borrowed.
• Appraised Value: The market value of the property as determined by a professional appraisal.
• Lender Risk: A higher LTV indicates a borrower has less equity, increasing the lender’s risk if the borrower defaults.

Deep Dive: LTV Tiers

Different LTV ratios often correspond to different loan products and terms:

• Low LTV (e.g., < 80%): Generally considered lower risk, often resulting in better interest rates and no private mortgage insurance (PMI).
• High LTV (e.g., > 80%): Higher risk for the lender, typically requiring PMI and potentially higher interest rates.

Applications in Real Estate

LTV is fundamental in:

• Mortgage Underwriting: Determines loan approval and terms.
• Refinancing: Influences eligibility and rates for refinancing existing mortgages.
• Home Equity Loans: Dictates how much equity can be borrowed against.

Challenges and Misconceptions

It’s important to note that LTV is based on the appraised value, not necessarily the purchase price. A high LTV doesn’t automatically mean a loan denial, but it affects the loan’s cost.

FAQs

Q: What is a good LTV for a mortgage?
A: An LTV below 80% is generally considered favorable, as it avoids PMI and often secures better rates.

Q: Can LTV change after closing?
A: Yes, as you pay down the loan or the property value appreciates, your LTV decreases.