When it comes to mortgages, understanding the loan-to-value (LTV) ratio is essential for making educated decisions on a potential loan. Knowing the LTV of a mortgage is crucial for lenders to assess the risks associated with the loan. By having a thorough knowledge of the LTV ratio, potential borrowers can also make more informed decisions when it comes to applying for a mortgage. In this blog post, we will discuss how to calculate LTV mortgage and the factors involved in the calculation. We will also explore why it is important to be aware of the LTV ratio prior to applying for a mortgage. By understanding how to calculate LTV mortgage, borrowers can ensure that they are making the best decision for their individual financial situation.
- Current loan balance ÷ Current appraised value = LTV.
- Example: You currently have a loan balance of $140,000 (you can find your loan balance on your monthly loan statement or online account). …
- $140,000 ÷ $200,000 = .70.
- Current combined loan balance ÷ Current appraised value = CLTV.
What You Need To Know
Purchasing and maintaining a home involves a lot of numbers, such as your credit score or debt-to-income (DTI) ratio.
Your loan-to-value (LTV) ratio is a different figure that is equally crucial throughout your homeownership, not just when you purchase a home.
Understanding your LTV, how to calculate it, the significance of LTV, and how to lower it if it’s too high are all beneficial whether you’re looking to buy a home or already own one.
What is Loan-To-Value Ratio?
LTV is a metric that banks and lenders use to gauge your debt management skills, assess your risk, and decide whether to offer you a mortgage. It represents the ratio of your debt to the value of your house.
Your LTV will alter as you reduce your debt and, ideally, as the value of your home rises.
How To Calculate Your LTV
Divide your loan amount by the home’s current value to determine your home’s LTV.
Let’s say you want to purchase a $200,000 house.
The amount you can put down for a down payment will determine your loan-to-value ratio, or LTV.
Your LTV ratio will be lower as your down payment amount increases.
| Down Payment | Amount Borrowed | LTV |
| $10,000 | $190,000 | 95% |
| $20,000 | $180,000 | 90% |
| $40,000 | $160,000 | 80% |
Now, let’s fast forward a few years.
You’ve been paying your mortgage as required, and you’ve managed to reduce the balance by $10,000. The housing market has improved at the same time, changing the value of your home.
According to the value of your house and the size of your mortgage, your LTV may alter as follows:
| Current home value | Current Mortgage Balance | LTV |
| $240,000 | $180,000 | 75% |
| $230,000 | $170,000 | 74% |
| $210,000 | $150,000 | 71% |
And congrats! You’ve lowered your LTV. Thus, you can take advantage of even more of the advantages that come with homeownership.
Your LTV exceeds 100% when you owe more on an asset than it is worth. This is commonly known as “being underwater” on your loan.
Why Your LTV Matters
Your LTV ratio is crucial because it will influence the types of loans and refinancing options you can get, as well as the interest rate you’ll pay.
LTV and conventional loans: The cost of mortgage insurance
A mortgage lender will typically require a buyer to put down 20% when purchasing a home using a conventional mortgage (a mortgage that is not backed by the federal government), making the LTV 80%.
The lender will demand that you buy private mortgage insurance (PMI) if your LTV is higher than 80%.
Your monthly mortgage payment will be increased by PMI. You will continue to pay the fee until your LTV reaches 78% or you refinance to a lower LTV. It does not go toward your mortgage principal or interest.
LTV and FHA loans: The cost and life of mortgage insurance premiums
Federal Housing Administration (FHA) loans have lots of benefits. With an LTV as high as 96 percent, you can qualify even with a lower credit score. 5%. They’re a fantastic option for first-time homebuyers and those who have had credit problems in the past.
The fact that you must pay mortgage insurance premiums (MIPs) is a disadvantage of FHA loans. You must pay the premium in order to help insure a loan, which is typically thought of as having a higher risk.
You pay a one percent upfront mortgage insurance premium (UFMIP) for FHA loans. 75% of the total amount due at closing; the remaining 25% is due over the following 11 years or for the duration of the loan, whichever comes first.
You guessed it: Your LTV will determine the amount of your monthly premium and how long you pay it. [1].
If you have a $200,000 FHA loan with a 30-year mortgage term, for example.
If you put:
Examine how LTV would impact the amount of MIP you would pay and the length of time you would pay for it.
| LTV | MIP(% of loan value) | Annual Cost | Duration | Total Cost |
| 90% or lower | 0.8% | $1,600 | 11 years | $17,600 |
| 91% – 95% | 0.8% | $1,600 | Life of loan | $48,000 |
| More than 95% | 0.85% | $1,700 | Life of loan | $51,000 |
LTV and VA loans: The cost of upfront funding fees
Your LTV will have an impact on how much you pay for the house if you are eligible for a Department of Veterans Affairs (VA) loan.
Mortgage insurance is not necessary for VA loans, but you must pay a funding fee upfront at closing. Your LTV determines the fee, which is a percentage of your home’s current value. [2].
| If your LTV is … | Funding Fee (% of loan value) |
| 90% or lower | 1.4% |
| 91% – 95% | 1.65% |
| More than 95% | 2.3% the first time (3.6% for each loan used afterward) |
LTV and refinancing: The ongoing cost of PMI
Let’s say you want to refinance your mortgage.
The most common reasons to refinance are:
Getting rid of – or reducing – your mortgage insurance is yet another significant factor for refinancing. Wait until you have an LTV of 80% to 85% before doing that. Otherwise, you’ll have to continue to pay mortgage insurance.
Home equity is the opposite of LTV. The equity in a home is its value less any outstanding debt. If your LTV is 80%, your equity is 20%.
LTV and home equity loans: The combined loan-to-value (CLTV) effect
You can “withdraw” funds from your house using a home equity loan (also known as a second mortgage) or a home equity line of credit (HELOC) to finance home improvements and repairs or settle higher interest debt.
Compared to personal loans and credit cards, home equity loans and HELOCs both have lower interest rates. Additionally, the combined loan-to-value (CLTV) ratio will be used for both of these loans.
Your CLTV is calculated by dividing the total of your current (or primary) mortgage balance, the amount of the HELOC, and the amount of the home equity loan you are applying for by the home’s current value. In other words, when lenders decide whether to approve your home equity, HELOC, or refinance application, they use your CLTV, which is the sum of all the liens on your property, to determine the risk involved.
If your LTV is 80% or higher, you won’t have much room to meet the CLTV requirement, especially when you factor in closing costs on a home equity loan of 2% to 5%.
That’s why knowing your LTV matters. If not, you might not be able to borrow against your home equity or it might end up costing you more than it’s worth.
How To Lower Your LTV
Let’s look at how you can increase your LTV if you have a higher LTV ratio now that you are more aware of how your LTV functions and why it is significant.
Make a larger down payment
Making a smaller down payment could be the best financial move for you for a variety of reasons. However, if you have the cash on hand (and it won’t ruin your budget), think about putting down a bigger deposit. It would lower your LTV because it would lessen the amount of money you would need to borrow from your lender.
Another benefit is that a smaller loan would require you to pay less interest over its term, which would result in substantial long-term cost savings.
Look for down payment assistance
It doesn’t hurt to ask for assistance if you have family members (including extended family, adopted family, a fiancé(e) or domestic partner) who can assist you with a down payment. You may be surprised at how lenient many of the laws governing gifting are, but the IRS sets the limits on how much you can receive as a gift before the donor must pay gift tax.
If you’re getting an FHA loan, you might be eligible for down payment assistance from your employer, a labor union, a charitable organization, or a state or local organization that provides down payment assistance to first-time home buyers.
Buy a less expensive home
Your ideal house may exist, but can you actually afford it? If your ideal home is currently out of your price range, you might want to look for a more practical alternative. Purchasing a house that allows you to put down a bigger down payment and lowers your LTV may make financial sense.
Bonus: Your lower LTV will make it simpler to refinance or obtain a home equity loan in the future if you decide to expand your home.
Make your monthly payments + extra
Making timely, full monthly mortgage payments is the simplest way to reduce your LTV. Try making a small extra payment each month if you want to hasten the process. Every additional dollar directly contributes to reducing your mortgage balance.
Your LTV can be reduced more quickly and your mortgage repayment schedule can be cut by years with just an extra $100 per month. That may enable you to significantly reduce your mortgage’s interest payments.
Reappraise your home
The fact that buying a house tends to increase in value over time is one of the best aspects of doing so. Keep an eye on the housing prices in your area. If property values are rising, you might want to think about having your house revalued.
When you have your home revalued, a qualified appraiser may examine important components of your house and property and compare it to homes in the neighborhood that are similar to yours. They’ll calculate the fair market value of your house using those metrics.
You might be able to refinance your home with a higher LTV if the appraised value of your home has increased sufficiently. As a result, you can cancel your mortgage insurance and perhaps even receive a lower interest rate.
The Power of Knowing Your LTV
Knowing your LTV can help you decide how much house you can afford and what kind of mortgage is best for you. It can also help you make wise decisions about the actual costs of purchasing a home.
Knowing your LTV can also assist you in determining whether a refinance or home equity loan is the best option for you.
In order to determine your LTV today, assess the value of your home using a calculator and your mortgage statements.
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FAQ
How do you calculate 80% LTV?
The loan-to-value ratio is calculated by dividing the amount of the mortgage lien by the estimated value of a property. If you put 20% down on a $200,000 house and make a $40,000 payment, the house would still owe $160,000, giving it an LTV of 80%.
Is a 40% LTV good?
Aiming for a LTV of 80% or less is generally a good LTV ratio for a mortgage. Being able to maintain these figures can increase your chances of receiving a preferred loan option with better interest rates.
What is an 80% LTV?
The loan-to-value ratio is the difference between the amount owed on a mortgage and the value of the property. It is expressed as a percentage. The loan-to-value is 80% if you obtain a mortgage for $80,000 to purchase a $100,000 house because you borrowed money equal to 80% of the house’s value.
What does a 75% LTV mean?
Your LTV would be 75% if you owe $150,000 on your mortgage and your house is worth $200,000 Consequently, you still owe 75% of the home’s value but have 25% equity in it. Requirements. Most banks demand that LTVs be no higher than 80 to 85%.