Loan-to-Value Ratio

Loan-to-Value Ratio or LTV

The loan-to-value ratio or LTV ratio is calculated by dividing the loan balance of a property by the market value and is expressed as a percentage. For example, a property with a loan balance of $400,000 and a market value of $500,000 has a Loan-to-Value Ratio of 80%.

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The Loan-to-Value Ratio can be used to estimate the amount of equity you have in a property. If the LTV ratio for a property is 75%, your equity position in a property is 100 minus 75 or 25%. You can then multiply .25 times the market value to determine the equity amount.

Lenders may require mortgage insurance on loans with a loan-to-value ratio greater than a predetermined amount, usually 80%. This means that the purchaser of a property will need to put a minimum of 20% down to avoid paying mortgage insurance premiums. Mortgage insurance is a premium amount which is added to the monthly mortgage payment. The purpose of mortgage insurance is to protect the lender if the buyer defaults. The Loan-to-Value Ratio is also used when an investor wishes to refinance a property. For example, you have owned an investment property for a number of years and you would like to refinance the property to take cash out. Most lenders will allow a maximum of 75% the appraised value or a 75% LTV ratio for the new loan amount. Lenders who refinance at loan-to-value ratios greater than 75% will usually charge less favorable interest rates. The lower the loan-to-value ratio, the greater the property owner’s equity and the less likely they are to default on the loan. A lower loan to value ratio translates into less risk for the lender.

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