Loan-To-Value Ratio (LTV): How to Calculate LTV and What it Means
Calculate loan-to-value ratio and learn what LTV means in real estate
Loan-to-Value Ratio Calculator
What is a Loan-to-Value (LTV) Ratio?
Loan-to-value (LTV) is a financial term that refers to the ratio of a loan to the appraised value or purchase price of the asset that is being financed. In the context of mortgages, LTV is an important factor that lenders use to determine the risk of a loan.
Why is LTV Important?
The higher the LTV, the riskier the loan is for the lender. A high LTV indicates that the borrower is borrowing a larger percentage of the asset's value, which means that there is less equity in the property. This makes it more difficult for the lender to recover the full value of the loan in the event of a default.
LTV is one of the factors that determine the interest rate, the type of mortgage product, and whether or not the borrower is required to pay private mortgage insurance (PMI). Generally, lenders prefer lower LTV ratios because they are less risky.
How to Calculate Loan-to-Value
To calculate LTV, divide the amount of the loan by the appraised value or purchase price of the property. For example, if you want to borrow $80,000 to purchase a home that has an appraised value of $100,000, the LTV would be 80%.
Here is the formula to calculate the Loan-to-Value Ratio:
First Mortgage LTV = (First Mortgage Balance / Current Value) * 100
Total LTV = (First Mortgage Balance + Second Mortgage Value + Third Mortgage Value) / Current Value * 100
Conclusion
In summary, loan-to-value (LTV) is a financial term that refers to the ratio of a loan to the appraised value or purchase price of an asset. In the context of mortgages, LTV is an important factor that lenders use to determine the risk of a loan and to determine the interest rate, type of mortgage product, and whether or not the borrower is required to pay private mortgage insurance (PMI).