When you apply for a mortgage, one of the things that lenders want to know is what portion of the value of the home you wish to finance. In other words, they want to know how much of a down payment you are going to be making in relation to the overall cost of the home. This percentage is known as the loan-to-value ratio (LTV).
Calculating the Loan-to-Value Ratio
To calculate LTV, use the following equation. Simply divide the total amount of the mortgage by the appraised value of the property:
Here's an example of how to calculate LTV. If you are buying a property with an appraised value of $200,000 and you apply for a $160,000 mortgage, then:
Loan-to-Value Calculator (LTV calculator)
Try calculating your LTV using this calculator. Input the amount you owe on your loan, the appraised value of your home, then hit the calculate button to see your LTB.
Why LTV is important
This percentage is important to lenders because the higher your LTV, the lower your home equity. And lenders view borrowers with low equity as having a greater risk of defaulting on their loan.
Many people wonder what a good loan-to-value ratio is. Having less than 80% LTV presents less risk to lenders. As a general rule, lenders require those who take out a mortgage with an LTV greater than 80 percent to pay for private mortgage insurance. This protects them in the event a borrower defaults by ensuring that the outstanding balance of the loan will be paid off.
Lenders may also charge higher mortgage interest rates on high LTV loans than on loans where the down payment is at least 20 percent. And they may require a second appraisal of a property before they will approve the loan.
To avoid these pitfalls, it’s a good idea to keep the LTV in mind when searching for a home. Start by getting pre-approved for a mortgage before you go house hunting. This enables you to calculate how much you can afford to spend.
Refinance Options for LTV over 100%
If a borrower has an LTV over 100%, he or she owes more than the house is worth, and is considered upside-down on the mortgage. This can be a difficult situation to be in. However, there are options to refinance. The first is the HARP Refinance Program, and the second is the FHA Streamline Loan. If you calculated your LTV, and it was more than 100%, and you wish to refinance, take a look at these two options.