The loan-to-value ratio, or LTV, is a risk-assessment tool that we use to analyze your mortgage application. The higher the LTV, the riskier the loan, and the more it will usually cost the borrower.
LTV compares the value of your loan to the value of the property. We divide the loan amount by the purchase price or the appraised value of the home, whichever is lower, to reach the LTV ratio. For example, if the home is appraised at $400,000 and you are requesting a $300,000 loan, your LTV would be 75 percent.
There are many reasons that your LTV matters when you are getting a mortgage. Your down payment will impact the LTV, as well as our decision to approve your mortgage. If your down payment is under 20 percent and this causes the LTV to be higher than 80 percent, for example, we will usually require private mortgage insurance (PMI) if you are not getting a government-insured loan. Mortgage insurance is an additional cost you will pay, and it will be added to your monthly payment. It can be anywhere from 0.22 to 1 percent of your loan amount charged annually.
If you are required to pay PMI, it can be removed from your loan once you hit 80 percent LTV. This can happen if your home's value increases enough, you pay down the loan earlier than expected, or you make monthly mortgage payments until you pay off the loan enough to reach this level.
Your LTV will also matter if you ever decide to refinance. When you refinance your loan, the appraised value will be used based on comparable home sales over the last three months. The LTV increases the interest rate you pay on your refinance, as homeowners who have less of their own money in the home are viewed as a higher risk. If the LTV is more than 70 percent, you can expect around a 0.125 percent increase in the interest rate for every 5 percent increase.
The lower your loan-to-value ratio, the more favorably your application is viewed by us. A high LTV is usually reserved for only the most creditworthy borrowers.
The easiest way to lower your LTV ratio is by putting down a large down payment. Doing so gives you automatic equity in the home and more vested interest in making your monthly mortgage payments. Aim for getting your LTV as low as you can to get the best rate, as well.
Along with your LTV, we will also look at your credit, income, employment history, down payment and debt-to-income ratio to evaluate your application.