The Loan-to-value ratio (LTV) is a calculation that measures how much you need to pay for a mortgage (loan) in relation to how much the asset you are borrowing money for is worth.
In real estate is important to note that to determine the “value” part of the loan-to-value ratio, you should use the appraised value of the home at the time of closing. So, to calculate the loan-to-value ratio (LTV) all you need to do is get the amount of mortgage you have yet to pay and divide by the appraised value of your home. The result of that should be put in percentage and, basically, defines how much of the property you have (home equity) and how much still needs to be paid.
Why and how is it used?
The Loan-to-value ratio (LTV) is usually used by lenders – during the underwriting or the refinancing of a current mortgage into a new loan - to assess if the loan is risky or not. The ideal situation is to have the lowest percentage you can, as lenders will likely give you better interest rate in connection with your loan. It’s said that anything below 80% will give you great conditions. Plus, when it’s over 70%, the mortgage companies will likely obligate you to acquire Private Mortgage Insurance (PMI) so their risk is diminished.
Let’s see a practical example to better understand the concept: Homebuyer Laura got a $75,000 loan to mortgage a $100,000 home. Her Loan-to-value ratio (LTV) is calculated by dividing 75,000 by 100,000, which would be 0,75 or 75%, a good number that will give her good payment benefits.
Real Estate tips:
Find a real estate agent and let him/her do the math for you!