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Loan to Value (LTV) Ratio, How It Works and Why You Need to Understand It

ltv ratio

If you are in the market for a new home and plan on using mortgage financing to buy your next home, you will likely hear the phrase “loan to value” or “LTV”. Let’s take a quick look at the loan to value ratio including why it’s important, how to calculate it, and how it can affect your mortgage.

What is the Loan to Value (LTV) Ratio?
The LTV ratio is a number that compares how much money you owe against your home with its resale value in the marketplace. A low LTV ratio indicates that you have far more equity in your home than you owe in mortgage payments; conversely, a high LTV ratio indicates that you owe almost as much as your home is worth.

ltv ratio1Calculating your LTV ratio is easy. Simply divide the amount that you have remaining in your mortgage by your home’s value. For example, if you own a home worth $250,000 and you still owe $150,000 on your mortgage, the calculation would be $150,000 divided by $250,000, which gives you a LTV ratio of 0.6 or 60 percent.

Why the LTV Ratio is Important?ltv ratio2
Your LTV ratio is important for a number of reasons. First, your mortgage lender will use this figure as part of their risk calculation when they assess your financial suitability for your mortgage. If you’re only putting 5 percent of the purchase price in as a down payment you’ll have a LTV ratio of 95 percent, which is a riskier loan than one with a LTV ratio of 30 percent, and will almost certainly come with a higher interest rate.

If you have a LTV ratio higher than 80 percent and you’re getting a mortgage from a conventional lender, you’ll also be required to pay for private mortgage insurance (PMI). Although PMI rates generally sound quite low usually in the neighborhood of 0.5 to 1 percent, this can add hundreds of dollars to your monthly mortgage payment. Note that PMI may not apply to you if you’re seeking out a government backed mortgage from Veteran’s Affairs, the USDA, or the FHA.

While the LTV ratio might seem simple, this number can affect your mortgage in a variety of ways. Contact your real estate agent or mortgage advisor today to learn more about the LTV ratio and have any questions you may have answered by an experienced professional.

moo thorpe headshotFor more helpful tips please contact me at 505.780.0310, or email me at moo@moothorpe.com and I will be happy to assist you.

Whether you are selling your home, or buying a home, I can help you with your endeavor.

 

 

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