When you're applying for a mortgage or looking to refinance, you may hear the term "loan-to-value," or LTV. This ratio, usually shown as a percentage, is very important to lenders. Understanding what it means can help you to improve your chances of getting a loan and can even decrease the cost of your loan.
What It Is
The loan-to-value is a ratio of the amount of your mortgage loan to the assessed value of the home. For example, if the home is worth $200,000 and you have a $40,000 down payment, you only need a $160,000 loan, which equals a 80 percent LTV. If you only had a $20,000 down payment, you'd need a $180,000 loan, which would give you a 90 percent LTV.
Why It Matters
Lenders need to balance the risk that you present as a borrower with their chances of making money on the loan. The lower your LTV, the less of a risk you present. If your LTV is greater than 80 percent, you will probably have to pay additional insurance costs.
When you buy a fixer-upper home, your LTV may not look so good. The property's assessed value may be just $100,000, but you need $125,000 to purchase the home and make the adjustments you need to put it in livable condition. If you find yourself in this type of situation, consider applying for the Department of Housing and Urban Development's Section 203(k) program, which helps you secure this type of loan.
LTV and Home Equity Loans
If you subtract your LTV percentage from 100, you'll see the amount of equity that you have in your home. If your LTV is less than 80, you may be able to get a home equity loan based on the amount of equity that you have. You will usually have to keep 20 percent equity in the home. For example, if you have a 50 percent LTV, you also have 50 percent equity in the home. You would be able to borrow up to 30 percent of your home's value as a home equity loan.
Varying LTV Rates
Your LTV is not always a number that goes down steadily as you pay off your mortgage. Because it's tied to the value of your home, it can change in either direction. If the value of your property declines, you may find that you're in a position in which you owe more than the home is worth.