Loan-to-value ratio (LTV) is a financial metric that expresses the relationship between the mortgage amount and the property's appraised value, calculated by dividing the loan amount by the property value. For example, a $320,000 mortgage on a $400,000 home produces an LTV of 80% ($320,000 ÷ $400,000 = 0.80). LTV is one of the most important factors in mortgage underwriting because it directly measures the lender's risk — the higher the LTV, the more the lender has at stake relative to the property's value. Learn more about what LTV means for your mortgage.
LTV affects virtually every aspect of the mortgage. Higher LTV ratios (above 80%) typically require private mortgage insurance (PMI), which protects the lender if the borrower defaults. Higher LTV also generally means higher interest rates — lenders charge more for riskier loans. And higher LTV may limit the loan programs available — jumbo loans, for instance, typically require LTV of 80% or less.
The combined loan-to-value (CLTV) ratio is used when a property has more than one mortgage. If a borrower has a $320,000 first mortgage and a $40,000 HELOC on a $400,000 home, the CLTV is 90% ($360,000 ÷ $400,000). Lenders consider CLTV when evaluating applications for second mortgages, HELOCs, and refinances. Most lenders limit CLTV to 80-90% for home equity products.
Borrowers can reduce their LTV in two ways: by making a larger down payment at purchase (reducing the loan amount relative to the value) or by building equity over time through mortgage payments and property appreciation. When LTV drops below 80%, the borrower can typically request removal of PMI (and under the Homeowners Protection Act, PMI must be automatically terminated at 78% LTV based on the original amortization schedule).
At closing, LTV is reflected on the closing disclosure through the relationship between the loan amount and purchase price. The appraisal value may differ from the purchase price — in which case the lender uses the lower of the two to calculate LTV (being conservative). Use Beycome's mortgage calculator to model different LTV scenarios, or our home equity calculator to estimate your current LTV. Get your free closing quote.