You might have heard the term “loan-to-value ratio” if you have ever had a mortgage. A loan-to-value ratio is the ratio between the value of your home loan and the home’s actual value.
When you apply for a mortgage, your loan-to-value ratio is an important factor that might save you money — or get your loan application rejected. Find out why you should care about your LTV, how to calculate it and how the home value can affect whether you get the best rate on a mortgage.
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Why You Should Care About Your Loan-to-Value Ratio
When you apply for a loan, the underwriter will look at your home appraisal and consider your LTV — if your LTV is lower, you’ll likely get better mortgage rates.
Because borrowers with lower LTVs have more home equity in their properties, lenders consider them less risky or less likely to default on the mortgage. For this reason, an applicant with a low LTV will tend to get the best mortgage rates. If a borrower with a low LTV does default, the lender would have a better chance of selling the home for the balance of the mortgage.
You might have to pay private mortgage insurance if your LTV is too high. Typically, PMI is required unless you put down 20 percent of the home’s value. Some specialty loans enable eligible applicants to carry a high LTV, such Federal Housing Administration, U.S. Department of Agriculture or Veterans Affairs loans.
How to Calculate Your LTV
To calculate your LTV, divide your loan amount by the home’s appraised value. For example, if you have a $200,000 mortgage loan balance and your home is worth $250,000 you have an 80 percent LTV ratio: 200,000 ÷ 250,000 = 0.80.
If you have a first mortgage and a second mortgage you must calculate your combined LTV. To do this, combine both balances and divide that sum by the current appraised value of both properties.
What Is an Acceptable LTV?
If your LTV is greater than 80 percent your home loan lender will likely require you to carry private mortgage insurance. Think of this type of insurance as “collateral” for your loan — you’ll need to pay it until you reach an acceptable 78 percent LTV.
Find Out: 6 Things You Need to Know About PMI
Refinance Options for High LTVs
If you have a very high LTV you are probably “upside down” on your mortgage, which means your house is worth less than you owe for it. If you’re in this camp you might be able to refinance through special programs designed for homeowners with LTVs that exceed 100 percent:
- The Home Affordable Refinance Program is an option for eligible applicants with mortgages owned by Fannie Mae or Freddie Mac that originated before May 31, 2009. The HARP program has a final application deadline of Sept. 30, 2017.
- If you already have an FHA mortgage you might be eligible for an FHA streamline loan. The FHA streamline refinance program requires that the new loan provides some benefit to the borrower, such as modified loan term and/or reduced interest rate.
- The USDA and VA also offer streamlined refinance options.
Each program has specific eligibility requirements, including being current on the existing loan.
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