STOCKHOLDING CLASSROOM
Date Published: November 15, 2024
Loan-To-Value Ratio
What is Loan-to-Value Ratio?
The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher-risk loans. Therefore, if the mortgage is approved, the loan has a higher interest rate. Additionally, a loan with a high LTV ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender. This type of insurance is called private mortgage insurance (PMI).
How to Calculate the Loan-to-Value Ratio
Interested homebuyers can easily calculate the LTV ratio of a home. This is the formula:
LTV ratio=MA/APV
Where
MA= Mortgage Amount
APV=Appraised Property Value
For Example If you buy a home appraised at $100,000 for its appraised value, and make a $10,000 down payment, you will borrow $90,000. This results in an LTV ratio of 90% (i.e., 90,000/100,000).
The Bottom Line
A loan-to-value ratio typically represents the amount of a mortgage compared to the property's value. An 80% LTV, for example, would mean a mortgage equal to 80% of the property's value. Borrowers often can get better terms on their mortgages with lower LTVs because they require higher down payments. The more money borrowers can put down, the less likely it becomes that they will be a risk in the eyes of lenders. Mortgages with LTVs higher than 80% usually require private mortgage insurance, which adds an additional cost to monthly payments.