What Is a Loan-to-Value Ratio (LTV) & How Is It Calculated?

Highlights:

• A loan-to-value (LTV) ratio is used by lenders to help determine the financial risk of a mortgage.
• To find the LTV ratio of a mortgage, divide your current balance by the appraised value of the related property and multiply the answer by 100 to get a percentage.
• Different mortgage lenders will have different criteria for LTV ratios, but most prefer an LTV ratio of 80% or below.

If you're in the market for a new home, you may hear your mortgage lender mention your loan-to-value (LTV) ratio. What is an LTV ratio? Why does it matter to your lender? And how does your LTV ratio affect the terms of your mortgage?

What is a loan-to-value ratio (LTV)?

An LTV ratio is a number used by lenders to help determine the financial risk of a mortgage.

Your LTV ratio expresses the amount of money that you've borrowed compared to the market value of your home. So, if your LTV ratio on a mortgage is 75%, that means you have taken out a loan for 75% of your home's value.

Lenders may consider your LTV ratio as one factor when evaluating your mortgage application. Your LTV ratio may also impact the interest rate a lender sets for your loan.

LTV ratios are especially influential in mortgage lending, but they may impact certain other secured loans or lines of credit. For example, lenders may also consider your LTV ratio when you apply for a home equity line of credit (HELOC) or a home equity loan.

How to calculate an LTV ratio

To find the LTV ratio of a mortgage, divide your current balance by the appraised value of the related property. Then, multiply the answer by 100 to get a percentage.

Say you're looking to buy a home with an appraised value of $200,000 and a sale price of $190,000. You've worked hard to save a down payment of $40,000 and will cover the rest with a $150,000 mortgage. If you divide your $150,000 mortgage amount by the home's $200,000 value, you'll get an answer of 0.75. Multiply that number by 100, and you have an LTV ratio of 75%.

Written as a math problem, the calculations look like this:

$150,000/$200,000 x 100 = 75%

What is a good LTV ratio?

Different mortgage lenders will have different criteria for LTV ratios, but most prefer a ratio of 80% or below.

Mortgages with higher LTV ratios pose a greater financial risk to a lender. The more you borrow relative to a home's total value, the more money a lender must put on the line — and the less likely the lender is to recoup its money should you default on the loan. So, generally speaking, the lower your LTV ratio the better.

If a LTV ratio exceeds 100%, the mortgage is considered “underwater,” meaning the borrower owes more than the property securing the loan is worth. A mortgage might become underwater as the result of missed payments, or because the property's value has decreased over time.

Why are LTV ratios important in real estate?

In real estate, LTV ratios represent the amount you owe on your mortgage compared to the total appraised value of your home. As is the case with other types of loans, mortgage lenders generally like to see an LTV ratio of 80% or less when you apply for a mortgage.

Lower LTV ratios help signal to lenders that you may be less likely to default on your mortgage. High LTV ratios mean that the lender is likely assuming more risk with the loan.

Although some lenders will approve loans with an LTV ratio above 80%, they typically require the borrower to purchase private mortgage insurance (PMI). PMI is a type of insurance that helps protect the lender in the event of foreclosure. PMI is added to your other housing expenses and can cost anywhere from $30 to $70 per month for each $100,000 you've borrowed. Lenders generally require PMI until the borrower has built at least 20% equity in their home.

You can reduce the likelihood you'll have to pay for PMI and offset your LTV ratio by making a larger down payment, which is the amount of money you can pay toward your home upfront. Most lenders require a down payment of at least 20% to avoid PMI altogether.

What is a combined loan-to-value ratio (CLTV)?

Like an LTV ratio, your CLTV ratio compares the amount you owe on your primary mortgage to your home's appraised value. However, CLTV ratios also include all other secured loans that use your home as collateral. For instance, if you have a mortgage and a home equity loan, your CLTV reflects how much you owe in total.

Say you own a home worth $200,000 and owe $100,000 on your mortgage. This puts your LTV ratio at 50%. If you then take out a HELOC worth $50,000 to make some needed repairs, you now owe a combined $150,000 against your home's $200,000 equity. Your LTV ratio remains at 50%, but your CLTV ration, which considers all loans taken against the home's equity, is 75%.

Because CLTV ratios account for multiple loans linked to the borrower's home, they provide a clearer picture of an individual's overall debt load. From a lender's perspective, CLTV also provides a more comprehensive picture of financial risk.

How do LTV and CLTV impact your loan terms?

Your LTV and CLTV ratios are among several aspects of your financial profile a lender may use to approve or deny your application for a mortgage, home equity loan or HELOC. If either ratio is too high, your lender may interpret your application as a liability and decline to offer you financing.

Even if your mortgage application is accepted, lenders commonly use your LTV and CLTV ratios to determine the interest rate for your loan. For example, a higher LTV ratio generally translates to a higher interest rate and a more expensive mortgage long-term.

That means lowering your LTV ratio can help you secure a more affordable loan. If you're looking to reduce your LTV ratio, first consider saving for a larger down payment. If you've already taken out a mortgage, you'll decrease your LTV ratio each time you make a monthly payment toward what you owe. If your loan terms allow, you can even make accelerated payments to simultaneously reduce your debt and your LTV ratio.