Loan-to-value ratio (LTV)

Before you rely on it

What to check

Use the lender's appraised value, since that is the figure the decision gets made on.

The common error

Where people go wrong with loan-to-value ratio (LTV)

Working from an online estimate. Those can differ from an appraisal by enough to move the loan across a pricing threshold, which changes the rate on the whole balance.

Worked through

Loan-to-value ratio (LTV) in plain numbers

You buy a $400,000 home with a 10% down payment. The loan is $360,000 and the LTV is 90%. After a few years of payments the balance is $330,000, and if the home is now worth $440,000 the LTV is 75%; lenders often price and structure loans by LTV. On many conventional loans, mortgage insurance is required above 80% and can be dropped once the ratio falls below it, under rules that vary. Borrow $270,000 against a $400,000 home and the ratio is 67.5%, comfortably lower; a drop in the home's value pushes the ratio up even if the loan is unchanged.

Easily confused

Loan-to-value ratio (LTV) and its neighbours

LTV is not the same as combined LTV or debt-to-income. Combined LTV counts all loans secured by the property, first mortgage and second liens together. Debt-to-income compares payments with income. LTV compares the loan with the property's value, so it measures the lender's cushion. Appraised value and purchase price can differ, and lenders usually use the lower. Loan-to-cost is used for construction, comparing the loan with the project cost, and a low LTV means more equity and lower risk for the lender.

In real decisions

Where loan-to-value ratio (LTV) turns up

Buyers use LTV to see how much down payment a lender will want; lenders use it to set rates, insurance requirements and maximum amounts. Refinancers check it to see if they qualify for the best pricing. Homeowners watch it to know when mortgage insurance can end; investors use it for rental purchases. Auto lenders also apply LTV to vehicle loans, where it can exceed 100% when fees and taxes are rolled in.

Know the edges

Where loan-to-value ratio (LTV) stops being reliable

The value in the denominator is an estimate, and it moves. An online estimate differs from an appraisal. Rules for cancelling insurance and for maximum ratios vary by lender and loan program, and a low LTV does not mean the borrower can afford the payments. Consider your budget, closing costs and reserves as well as the ratio. Confirm details with a lender, since programs change.

Quick answers

What people ask about loan-to-value ratio (LTV)

What LTV do I need to avoid mortgage insurance? On many conventional loans, an LTV of 80 percent or lower avoids it. Other programs have different rules. Ask your lender.

Does LTV change after I buy? Yes. It falls as you pay principal and as the home's value rises, and rises if the value drops.

Which value do lenders use? Typically the lower of the appraised value and the purchase price for a purchase loan, and the appraised value for a refinance.

Why does a lower LTV get a better rate? The lender risks less. More equity means the borrower has more to lose from default and the property can absorb a price drop.