What Is Loan-to-Value Ratio?

What Is Loan-to-Value Ratio?

Loan-to-value ratio (LTV) is the percentage of a property's appraised value that is financed by a loan: LTV = Loan Amount / Appraised Property Value x 100. An LTV of 80% means you are financing 80% of the property's value and putting 20% down. LTV is a primary risk metric for lenders and affects your interest rate, mortgage insurance requirement, and available loan programs.

Key LTV Thresholds

80% LTV is the threshold below which PMI is not required on conventional loans. 96.5% LTV is the FHA minimum for borrowers with scores of 580 or above (3.5% minimum down payment). 100% LTV applies to VA and USDA loans, which allow zero down payment.

Why LTV Matters

A higher LTV means less borrower equity and greater lender risk if the borrower defaults. Lenders charge higher rates for higher LTV loans and require mortgage insurance to protect against default losses. Improving your LTV through a larger down payment or home appreciation can unlock better rates and eliminate PMI.

What LTV Costs You in Dollars

On a $400,000 home with a $360,000 loan (90% LTV), PMI applies -- at 0.75%, that's about $2,700/year, or $225/mo added to the payment. Coming up with an extra $40,000 to reach 80% LTV eliminates that $225/mo entirely.

Combined LTV for Second Liens

When you have multiple loans on a property, lenders calculate combined LTV (CLTV): CLTV = (First Mortgage + Second Lien) / Appraised Value. Most lenders cap HELOCs and home equity loans at 85% to 90% CLTV.

Common LTV Mistakes

Treating LTV as fixed at closing. Your LTV changes every month as you pay down principal, and it can also shift with your home's market value.

Using the purchase price when refinancing. Lenders calculate refinance LTV on the home's current appraised value, not what you originally paid.