Loan-to-value ratio, commonly called LTV, compares the amount of a loan to the value of the property. It is an important concept for home purchases, refinancing, and home equity options.
How LTV is calculated
LTV is calculated by dividing the loan amount by the property value.
Example: If a home is worth $400,000 and the loan amount is $320,000, the LTV is 80%.
Why LTV matters
- It helps lenders evaluate risk
- It may affect available loan options
- It can influence interest rate and pricing
- It may determine whether mortgage insurance is required
- It affects refinance and home equity options
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LTV when buying a home
When buying a home, your down payment directly affects your LTV. A larger down payment generally results in a lower LTV. A smaller down payment generally results in a higher LTV.
LTV when refinancing
For a refinance, LTV is based on your new loan amount compared to the property's current value. If your home value has increased or your loan balance has decreased, your LTV may be lower than when you first bought the home.
LTV and home equity
Home equity is the difference between your home's estimated value and the amount you owe. Homeowners exploring a HELOC, home equity loan, or cash-out refinance should understand how LTV may affect the amount of equity that could be accessible.