How LTV is calculated

LTV is calculated by dividing the mortgage amount by the appraised value of the home. For example, if a home is worth $200,000 and you are borrowing $180,000, your LTV would be 90%. The appraised value of a home is measured by a professional appraiser, who will look at factors such as location, size, age, and condition of the property to come up with an estimated value. It's important to note that while this appraised value may not always match the purchase price, it will be used when calculating LTV. See our Quick Guide to Track Your Home’s Value in 3 Steps to see where your property currently stands. 

Risk, Interest Rates, and PMI

The higher the LTV, the riskier the loan is considered to be for the lender. This is because if a borrower defaults on the loan, the lender may not be able to recover the entire value of the loan if they have to sell the property. As a result, borrowers with higher LTVs are often seen as a higher risk and offered higher interest rates. However, government loans like FHA, VA and USDA offer higher ratios up to 100% and allow for buyers with less cash to be able to afford buying a home. In the case that a borrower's LTV exceeds 80%, private mortgage insurance (PMI) may be required. PMI is used to protect lenders from defaulting borrowers, and it is usually required if the borrower has put less than 20% down on the property.

A lower LTV generally results in a lower interest rate, which can save borrowers money over time. Additionally, knowing how LTV works can help borrowers take advantage of special offers or programs that may be available to those with lower LTVs. The size of the down payment can also have an impact on LTV. A larger down payment means a lower LTV, and therefore a lower interest rate. However, it's important to note that a lower down payment may mean a higher borrowing amount and a higher LTV, which can result in the need for PMI and a higher interest rate. 

LTV and Investments

LTV can also be used to determine the maximum allowed borrowing for investment properties. Investment properties often have lower maximum allowed LTVs than primary residences. This means that if you're looking to purchase an investment property, you may need to have more cash on hand to put down as a down payment. 

Appraisals and LTV 

Even if a seller accepts an offer below the listed price point, the appraisal will still use the initial value when calculating LTV. This can be a significant consideration for buyers who are trying to get the best deal on a property. It's also worth noting that when selling quickly, the existing balance may not be fully covered by the selling price, which can have consequences for the LTV.

Conclusion

LTV is an important metric for both buyers and lenders in the real estate market. Knowing LTV can help you make better decisions when buying or investing in properties and avoid unwanted surprises. Whether you're a first-time home buyer, an experienced investor, or somewhere in between, understanding LTV is an important part of navigating the real estate market.

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