What is a Loan to Value Ratio and How Does it Affect Your Mortgage?

You may have heard the term loan-to-value ratio thrown around when discussing financing and loans. This calculation is crucial to receiving a loan or mortgage, so let’s dive into what it is, how to calculate it, and why it matters for your financial situation.

What is Loan-to-Value Ratio?

Your loan-to-value (LTV) ratio is a calculation used by mortgage lenders to determine how much risk they’re taking on by issuing you a loan. As your LTV increases, the potential loss the lender will face if the borrower fails to make their monthly payments also rises, creating more risky circumstances for the lender. Your LTV ratio directly impacts your loan’s interest rate and whether your loan will require insurance.

How Do You Calculate Your LTV Ratio?

To calculate your LTV ratio, you divide the loan amount by the appraised value and multiply by 100 to receive a percentage. For example, if you purchase a home appraised for $100,000 and you make a $10,000 down payment, you will borrow $90,000 for the home. Multiply that by 100 and your LTV is 90%. As you pay back your loan and increase your equity, your LTV will lower.

Why Does Your LTV Matter?

Your LTV is an assessment of lending risk. The higher a borrower’s LTV ratio, the riskier the loan is for a mortgage lender. If a borrower defaults on their mortgage loan, the lender is less likely to recoup the money owed. Higher LTV ratios may lead to higher interest rates or for mortgage insurance to be added to your payments. Lower LTV ratios are considered safer in the eyes of lenders but may require a larger down payment.

Your LTV requirements and limits will vary depending on your loan type and your financial situation. It’s best to speak to your Loan Originator to learn how your LTV will affect your mortgage. When you’re ready to learn more, contact us today! Our Licensed Loan Originators are excited to help you achieve your home financing dreams.