Buying a home is likely one of the biggest financial decisions you’ll make in your life. Understanding key metrics like the loan to value ratio can help you make smarter choices when getting a mortgage. In particular, the 80 LTV ratio is an important benchmark to be aware of.
In this comprehensive guide, we’ll explain what the 80% LTV ratio is, why it matters, and how to calculate it yourself. Read on for a full overview of how this ratio impacts your home buying journey.
What is an 80% Loan to Value Ratio?
The loan to value (LTV) ratio compares the amount of money you borrow for a mortgage to the appraised value of the home you are buying. Specifically, the 80% LTV ratio means your loan amount is 80% of the home’s value.
For example, if you buy a $200,000 home with a $160,000 mortgage, your LTV ratio is 80% ($160,000 ÷ $200,000). This is considered an 80% LTV loan.
The LTV ratio is one of the key factors mortgage lenders look at when deciding loan terms In general, the lower your LTV, the better mortgage rate and terms you can qualify for since your loan amount poses less risk to the lender.
Why 80% LTV Matters for Mortgages
The 80% LTV threshold is significant for a few important reasons
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Avoids PMI – Private mortgage insurance (PMI) is an added cost tacked onto loans with LTVs higher than 80%. Staying under 80% allows you to avoid this extra monthly PMI premium.
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Better Rates – An 80% LTV or lower qualifies you for the best mortgage rates available. As your LTV goes higher, your rate typically goes up as well.
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More Equity – With a 20% down payment to get an 80% LTV, you are building instant equity in the home. This equity provides a buffer if home values decline.
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Lower Payments – The lower rate and lack of PMI with an 80% LTV also mean lower monthly payments. This improves affordability and cash flow.
For all these reasons, shooting for an 80% LTV or lower is ideal when financing a home purchase.
How to Calculate Your LTV Ratio
Figuring out your prospective LTV when buying a home is simple. Just follow these steps:
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Estimate home value – Get an approximate value of the home you want to buy. Online estimators or a real estate agent can help determine an accurate figure.
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Determine your down payment amount – Decide how much cash you can put down.Aim for at least 20% of the purchase price.
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Calculate loan amount needed – Subtract your down payment from the home’s value to get your required loan amount.
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Divide loan by value – Take your loan amount and divide it by the home’s value. This gives you your LTV ratio.
For example, if you purchase a $250,000 home and can put $50,000 down, your loan would be $200,000. Dividing the $200,000 loan by the $250,000 home value gives an LTV of 80% – right at that sweet spot!
Tips for Reaching an 80% LTV
Here are some tips to help you get into an 80% LTV mortgage:
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Save Aggressively – Building a 20% down payment requires disciplined saving over time. Make this a priority and avoid unnecessary costs. Consider a side hustle to boost your savings rate.
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Lower Purchase Price – Opting for a more affordable home can help cut down the required loan amount to hit that 80% LTV mark. Stay realistic with your housing budget.
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Make Extra Payments – If you are close to 80%, consider making extra principal payments after closing to instantly improve your LTV. Even a few thousand dollars can bump you into a better ratio.
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Ask for Seller Credits – Sellers may be willing to cover some closing costs through a credit. This lowers your out-of-pocket expense and needed loan amount.
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Get an Appraisal – Pay for an appraisal before buying to know the home’s precise value. This ensures your loan doesn’t exceed 80% of the appraised amount.
Alternatives if 80% LTV Isn’t Possible
For some buyers, saving a full 20% down payment just isn’t feasible. Here are some options if an 80% LTV mortgage isn’t in reach:
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Larger Down Payment – Putting down 15% or even 10% still gets you a better LTV than 0% or 5% down programs. Shop around for a loan that fits your savings.
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Piggyback Loan – You may be able to get a piggyback HELOC for part of the down payment to reach 80% LTV on the main mortgage.
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Pay PMI – PMI isn’t ideal but won’t necessarily break the bank either. Just be sure to refinance once you build 20% equity.
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FHA Loan – FHA loans only need 3.5% down but charge an annual PMI premium. This can be a decent lower down payment option.
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VA or USDA Loan – No down payment is required on VA and USDA loans. But PMI and loan limits apply. Make sure you qualify for these specialized programs.
How LTV Impacts Mortgage Rates
In general, the lower your LTV, the better mortgage rate you can qualify for. Here’s a look at how LTV tiers impact average 30-year fixed rates:
| LTV Ratio | Rate |
|---|---|
| 80% or lower | 3.50% |
| 85% | 3.875% |
| 90% | 4.125% |
| 95% | 4.25% |
As you can see, an 80% LTV nets the lowest rate. And each 5% increase in LTV adds about 0.125% to 0.25% to the interest rate. Locking in an 80% LTV at the time of purchase saves a ton on interest over the life of the loan.
Refinancing to Reduce LTV
If you bought high with a bad LTV, refinancing when you have 20% equity is a great way to improve it.
For example, if you initially purchased with 10% down but now have 21% equity after a few years of home price appreciation, refinancing allows you to benefit from an 80% LTV by tapping that equity. This opens up better rate and term options.
Just be sure to weigh closing costs before refinancing solely to improve your LTV. But combining a refi with a lower rate, shorter term, or cash-out amount often makes sense.
LTV Takeaways
Optimizing your loan to value ratio is key to saving on mortgage costs both now and in the long run. If at all possible, push yourself to get into that 80% LTV range when purchasing a home. But even if 80% isn’t feasible, know that any amount of down payment is better than none.
Use mortgage calculators online to play around with different down payment amounts and see the impact on your prospective LTV. Understanding this crucial ratio gives you power over the home buying process.
How lenders use loan-to-value
Lenders evaluate your total financial picture when youre applying for a mortgage, but calculations like loan-to-value ratio provide shortcuts.
The amount you want to borrow compared to the value of the property is how much the lender would be putting on the line. The lender weighs this against other factors — like your credit score and debt-to-income ratio — to determine whether what theyll earn from interest and other payments is worth the risk of making the loan.
An LTV of 80% or lower is most lenders’ sweet spot. Having a lower LTV can also help you get a lower interest rate. But depending on the rest of your finances, and the type of home loan youre using, you could have a loan-to-value ratio thats higher than 80%.
How do I calculate my LTV?
Loan-to-value ratio is derived from the loan amount divided by the value of the property. LTV is usually expressed as a percentage, so you have to multiply your answer by 100 to get the LTV.
For example, say youre looking to buy a $350,000 home, and youve got $28,000 for a down payment. Subtract the down payment amount from the cost of the home to get the loan amount: $350,000 – $28,000 = $322,000.
Now, divide the loan amount by the cost: $322,000 / $350,000 = 0.92
Multiply by 100 to get the LTV, which is 92%.
Or you can use our LTV calculator and simply plug in your numbers, no math required.
» Buying a car? Heres how LTV works for vehicle purchases
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Loan to Value Ratio “LTV” Explained
FAQ
How to calculate 80% loan to value?
What does a LTV of 80% mean?
How do I get 80% LTV?
What is 85% loan to value?
What is a loan-to-value calculator?
The loan-to-value calculator measures the relationship between the mortgage amount and the value of the home and is used by lenders to determine the risk associated with a secured loan. What is a Loan-to-Value (LTV) Ratio?
How to calculate loan-to-value ratio?
You can use the loan-to-value formula to calculate the LTV ratio: LTV = loan amount property value The LTV is equal to the loan amount divided by the home’s value, expressed as a percentage. Thus, to calculate a loan-to-value ratio, you need to know the value of the property you want to buy or refinance, and the size of the mortgage you need.
How do you calculate loan-to-value ratio?
Loan-to-value ratio is derived from the loan amount divided by the value of the property. LTV is usually expressed as a percentage, so you have to multiply your answer by 100 to get the LTV. For example, say you’re looking to buy a $350,000 home, and you’ve got $28,000 for a down payment.
What is loan to value (LTV)?
Loan to value is the ratio of the amount of the mortgage lien divided by the appraisal value of a property. If you put 20% down on a $200,000 home that $40,000 payment would mean the home still has $160,000 of debt against it, giving it a LTV of 80%. LTV is the reciprocal