The loan-to-value (LTV) ratio is a key figure that lenders use to gauge the risk of your mortgage. It shows how much of your property’s value you’re financing with your home loan compared to what percent you are putting down for your down payment.
The higher your LTV the more money you are borrowing, which makes your loan higher risk than someone who would be borrowing less.
Here’s how the math works:
- Divide the Loan Amount by the Property Value to find out what fraction of the home’s value is being financed.
- Multiply the Result by 100 to convert this fraction into a percentage. This percentage is your LTV ratio.
Example:
- Home Value: $300,000
- Loan Amount: $240,000
Step-by-Step Calculation:
- Divide: $240,000 (loan amount) ÷ $300,000 (home value) = 0.80
- Convert to Percentage: 0.80 × 100 = 80%
So, your LTV ratio is 80%.
In simple terms, you’re borrowing $240,000 to buy a home worth $300,000. The LTV ratio of 80% means that 80% of the home’s value is covered by the loan.
Another way to think about LTV is if you know what percentage you are putting down for your down payment, subtract that percentage from 100%, and the remainder will be your LTV. So if you are going to put 15% down on a home, then your LTV is 85%.
What is the maximum LTV a borrower can have?
Typically, the highest LTV a borrower can have is 97% on a conventional loan, which would mean you are putting 3% down on a home, or 96.5% for an FHA loan, which would pair with a down payment of 3.5%.
What is a typical LTV?
The average downpayment on a home in the US is 15% (National Association of Realtors). This would result in a LTV of 85%. That being said, when you break it down between repeat buyers and first time home buyers, a wider range is shown.
The median down payment percentage for repeat buyers was 19%, equal to a LTV of 81%, whereas for first time buyers, the median down payment was 6%, which leaves a LTV of 93%.
How does LTV impact my mortgage rate?
A higher LTV ratio usually means a higher interest rate because it’s riskier for lenders. Lower LTV ratios often qualify for better rates.
For conventional loans, if your LTV is over 80%, you’ll need to pay for PMI (private mortgage insurance) until your equity in the home reaches at least 20%, bringing your LTV down to 80% or below. Private Mortgage Insurance (PMI) typically costs between 0.3% and 1.5% of your loan amount per year. For a $450,000 loan, this means PMI could range from $1,350 to $6,750 annually, or approximately $112.50 to $562.50 per month. PMI is generally required if your down payment is less than 20%, and the cost can vary based on factors like your credit score, loan type, and loan-to-value (LTV) ratio.
So if you can ditch PMI, great! However, for the typical homebuyer, a 20% down payment can be a bad overall investment. We break down the math on why it’s usually better to buy sooner here.
If you are getting a FHA loan you’ll skip PMI though and pay a MIP (mortgage insurance premium) regardless of your down payment size.
Can I lower my LTV ratio after getting the loan?
Yes, you can. Paying down your mortgage faster or increasing your property’s value through improvements can help lower your LTV ratio over time.
How does lowering my LTV over the course of my loan benefit me?
- Better Loan Terms: As you chip away at your mortgage and bring down that LTV ratio, lenders might start offering you sweeter deals, like lower interest rates. A lower LTV means less risk for them, so they could reward you with a better rate.
- Ditch the PMI: When your LTV falls below 80%, you might be able to kiss Private Mortgage Insurance (PMI) goodbye. PMI can be a hefty extra cost, and getting rid of it means more money stays in your pocket.
- Boost Your Equity: Lowering your LTV means you’re building up equity in your home faster. This is a win if you plan to sell or refinance down the road, giving you a bigger slice of your home’s value.
- Stronger Financial Stability: A lower LTV means you’re not as heavily leveraged, which can solidify your financial standing. This boosts your confidence and flexibility for future financial moves.
- Better Negotiating Power: With a lower LTV, you’re in a stronger position to negotiate with lenders or explore new loan terms. Lenders see you as a lower-risk borrower, which can open doors to better deals.
In a nutshell: Lowering your LTV over time isn’t just about paying less—it’s about scoring better terms, saving on costs, and strengthening your financial footing.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.
