LTV stands for loan-to-value. It is simply your loan amount divided by the lower of the purchase price or appraised value.
How to Calculate LTV on a Purchase
Let’s say you are buying a house. You negotiated a sales price of $500,000. You are putting down 10%, so you will be borrowing 90% of the purchase price or $450,000. The lender sends out an appraiser to appraise the house. The appraised value is $480,000.
What is your LTV? $450,000 divided by the lower of purchase price or appraised value. In this case, $450,000 divided by $480,000, which works out to 93.75% LTV. You are still borrowing the same amount ($450,000) but your LTV went up because the house did not appraise for the selling price. Your LTV would have stayed at 90% if the house had appraised for $500,000. But it didn’t, so your LTV is now 93.75%.
How to Calculate LTV on a Refinance
You want to refinance, and you owe $300,000 on your current mortgage. After doing some research, you think your house is worth approximately $400,000. Therefore, you believe your LTV is $300,000 divided by $400,000 or 75%. Your lender sends an appraiser out. To your surprise, your house appraises at $430,000. What is your LTV? $300,000 divided by $430,000 or 69%.
Why is LTV important?
There are three reasons LTV is important:
- Pricing
- Underwriting
- PMI
Pricing
Pricing means the interest rate available for your specific loan situation. It takes into account credit score, loan amount, property type, loan purpose, occupancy, and loan-to-value. In general, the lower the LTV, the lower the interest rate.
Underwriting
Imagine you are a mortgage lender. Who would you want to lend to — someone who has a lot of equity in their home, or someone who has mortgaged it to the hilt? Probably the first person. Why? Because they represent a better risk. They have a lower loan-to-value than the second person. In general, it is easier to get approved with a lower loan-to-value.
PMI (Private Mortgage Insurance)
PMI is required whenever you are putting down less than 20% or have less than 20% equity in your home. The rates for PMI vary depending on loan-to-value. You pay more for PMI at 97% LTV than you do at 90% LTV. In the first example, the borrower whose house under appraised will pay more for PMI at 93.75% than he would have at 90%. Loan-to-value determines if you have to pay PMI and how much it costs you.
If you have any questions on how LTV can affect your ability to qualify or your rate, call Amerifund at (888) 650-7316 or fill out this form.