Loan to Value Calculator

What Is Loan-to-Value Percentage (LTV)?

The Loan to Value Percentage (LTV) represents the relationship between how much you borrow and the value of the property securing that loan. In simple terms, it shows what percentage of a property’s value you’re financing through debt versus paying with your own money.

For example, if you’re purchasing a home worth $200,000 and seeking a loan of $160,000, your loan-to-value (LTV) ratio would be 80%. The remaining 20% represents your equity in the property, typically in the form of a down payment.

Lenders use LTV as a key risk assessment tool. A higher LTV means you’re borrowing a larger proportion of the property’s value, which represents a greater risk for the lender. Conversely, a lower LTV indicates you have more “skin in the game” and presents less risk to the lender.

How to Calculate Your Loan-to-Value Ratio

The formula for calculating LTV is straightforward:

Let’s walk through a simple example using the exact scenario mentioned earlier:

If your property is worth $200,000 and you want to borrow $50,000, your LTV calculation would be:

LTV = ($50,000 / $200,000) × 100 = 25%

This 25% LTV is considered quite low, which is favorable for loan approval and terms. The lower your LTV percentage, the less risk you present to lenders, which typically translates to better interest rates and loan conditions.

Why Lenders Care About Your LTV Ratio

Lenders place significant importance on LTV ratios because they directly correlate with lending risk. Here’s why your LTV matters to lenders:

As stated in the introduction, “Lower LTV = easier funding + better rates/terms.” This principle is fundamental in lending. When you have a lower LTV, lenders view you as a lower-risk borrower, which typically results in more favorable loan conditions.

What’s Considered a “Good” LTV Ratio?

While “good” LTV ratios can vary by loan type and lender, here are some general guidelines:

Most conventional mortgage lenders prefer LTV ratios of 80% or lower. At this level, borrowers typically avoid private mortgage insurance (PMI), which can add significant costs to monthly payments. Government-backed loans like FHA, VA, or USDA may accept higher LTV ratios but often include other fees or insurance requirements.

How to Improve Your Loan-to-Value Ratio

If you’re looking to lower your LTV to secure better loan terms, consider these effective strategies:

Make a Larger Down Payment

The most direct way to lower your LTV is to increase your down payment. By contributing more of your own money upfront, you reduce the loan amount needed relative to the property value.

Choose a More Affordable Property

If increasing your down payment isn’t feasible, consider purchasing a less expensive property. Your existing savings will represent a larger percentage of the property’s value, resulting in a lower LTV.

Consider a Loan Co-signer

In some cases, adding a co-signer with strong credit and income can help you qualify for better loan terms despite a higher LTV ratio.

Wait for Property Value Appreciation

If you’re refinancing, waiting until your property appreciates in value can naturally lower your LTV without requiring additional payments.

LTV and Other Lending Factors

While LTV is important, lenders consider it alongside other factors when evaluating loan applications:

The interplay between these factors determines your overall loan eligibility and terms. While improving your LTV is valuable, addressing these other factors can also strengthen your loan application.

LTV Considerations When Refinancing

LTV plays a particularly important role when refinancing an existing loan:

When refinancing, your LTV is calculated based on your current loan balance and your property’s current appraised value. If your home has appreciated since purchase, your LTV may be lower than when you originally bought the property, potentially qualifying you for better terms.

Most lenders prefer an LTV of 80% or less for refinancing, though some programs allow for higher LTVs. Cash-out refinancing, where you borrow more than you currently owe to access equity, typically requires lower LTV ratios than rate-and-term refinancing.

Take Control of Your LTV for Better Loan Terms

Understanding your Loan to Value Percentage (LTV) empowers you to make informed borrowing decisions. Remember the fundamental principle: “Lower LTV = easier funding + better rates/terms.” By managing your LTV effectively, you can potentially save thousands of dollars over the life of your loan.