Quick Answer: What Is Loan-to-Value (LTV)?
Your Loan-to-Value (LTV) ratio is the percentage of your home's appraised value that you are borrowing from a lender. It is the direct inverse of your down payment or equity. If you buy a house with a 20% down payment, your LTV is 80%. Lenders use this number to assess the risk of your loan—the lower your LTV, the safer the bet is for the bank, resulting in better interest rates for you.
The Full Calculation: Doing the Math
Calculating your LTV is simple division. You divide your total mortgage loan amount by the appraised value of the property (or the purchase price, whichever is lower).
Purchase Scenario Example:
- Home Purchase Price: $400,000
- Your Down Payment: $40,000 (10%)
- Loan Amount Needed: $360,000
Calculation: $360,000 ÷ $400,000 = 0.90. Multiply by 100 to get 90% LTV.
Refinance Scenario Example:
If you already own a home and want to refinance, LTV depends on current market value:
- Current Loan Balance: $250,000
- New Appraised Home Value: $350,000
Calculation: $250,000 ÷ $350,000 = 0.714. Multiply by 100 to get 71.4% LTV.
Why Does LTV Matter?
Your LTV dictates almost everything about your mortgage approval and ongoing costs:
- Private Mortgage Insurance (PMI): The magic number in real estate is 80% LTV. If your LTV is higher than 80% on a conventional loan, the lender forces you to pay PMI every month until the balance drops to 80% or 78%.
- Interest Rates: Lenders set pricing tiers based on LTV. A borrower with a 70% LTV will almost always get a significantly lower interest rate than a borrower with a 95% LTV, because there is much less risk of the bank losing money if the home goes into foreclosure.
- Loan Type Eligibility: Different mortgage programs have strict maximum LTV caps.
- Conventional loans typically cap at 97% LTV.
- FHA loans cap at 96.5% LTV.
- VA and USDA loans are unique and allow for up to 100% LTV (zero down payment).
What is CLTV (Combined Loan-to-Value)?
If you take out a second mortgage, like a Home Equity Line of Credit (HELOC) or a Home Equity Loan, lenders will calculate your CLTV. This adds all your loans together.
If your home is worth $500,000, your primary mortgage balance is $300,000, and you want a $50,000 HELOC, your total debt is $350,000. Your CLTV is 70% ($350,000 ÷ $500,000). Most lenders cap CLTV around 80% or 85% for second mortgages.
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Try the Affordability Calculator →Frequently Asked Questions
How can I lower my LTV ratio?
You can lower your LTV in two ways: by paying down your mortgage principal balance faster (via extra monthly payments or lump sums), or by letting time and market forces increase the appraised value of your home.
Does an appraisal affect my LTV?
Yes, significantly. Lenders always use the lesser of the purchase price or the appraised value. If you agree to buy a house for $300k, but it only appraises for $280k, the lender uses $280k to calculate your LTV, which means you have to bring extra cash to closing to make up the difference.
When does PMI automatically fall off?
By federal law, lenders must automatically cancel your PMI when your LTV reaches 78% of the home's original appraised value (the value at the time you bought it). You can request cancellation sooner, at 80% LTV, but you usually have to pay for a new appraisal.