What is LTV (Loan to Value)?

In essence, the LTV is a ratio of loan-to-value used by mortgage lenders to evaluate the risk associated with approving a mortgage loan. When trying to determine the LTV of a home on a purchase transaction, simply divide the size of the mortgage loan by the lower of an appraised value versus the sales price of the home. On a refinance transaction, simply divide the size of the mortgage loan solely by the appraised value of the home, as there is no purchase price.

For example, assuming a home is being purchased for $400,000 and the appraised value is $410,000, and the buyer has $60,000 for a down payment, the mortgage loan size will be $340,000. By dividing $340,000 by $400,000, the LTV is 85%. The reason the purchase price was used to determine the LTV in this scenario is because it is the lesser of the purchase price versus the appraised value in a purchase transaction as explained above.

Typically, if an LTV ever goes above 80%, as in the case above, private mortgage insurance (PMI) is required. PMI protects lenders against a borrower defaulting on their monthly mortgage payment and secures them against foreclosure.

As far as mortgage rates are concerned, the lower the LTV, the lower mortgage rate. Again, this has to do with the risk associated with the mortgage loan. In general, the association between LTVs and mortgage rates are based on a sliding scale, usually in 5% increments. For example, an LTV of 70% could have a lower mortgage rate than an LTV of 75%.

Once an LTV is established, an online mortgage calculator can help determine monthly principal and interest payments. If the annual property taxes and homeowner’s insurance payments are known, an online mortgage calculator can accurately conclude the entire monthly mortgage payment.

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