Understanding Your New Home Loan: What's LTV?

By Emily Kerr
LoanPage Columnist

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It's crucial for determining your monthly mortgage payment. But just what is loan to value (LTV)?

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Loan Amount Determines House Size

When determining the amount of mortgage you can afford, LTV is one of the mortgage calculators lenders use to determine the amount they'll lend you.

LTV is used to determine the limits between your housing and debt ratios and where that number needs to be in order for the mortgage lender to approve you for a home loan.

Doing the Math

Simply stated, the LTV calculation is the amount you want to borrow divided by the value of the home you want to buy (or refinance). If you're looking at buying or refinancing a home with a value of $200,000 and want to secure a $160,000 loan, that home would have an 80 percent LTV because the home loan is 80 percent of the value of the home. With your down payment of $40,000, you've purchased 20 percent of the value of the home; this 20 percent is your home equity. The value of the home is determined by either the appraisal or the market value of the home, whichever is lower.

The ratio determined by this calculation is the LTV. It is the relationship between the loan amount and the value of the collateral (the home) securing the loan. If the home is valued at $200,000 and the loan request is for $100,000, there's a 50 percent LTV ratio.

Beating the Numbers

The more equity you have in your home, the lower the percentage of the LTV ratio. Mortgage lenders often require an LTV of 80 percent, though some lenders go as high as 95 percent. Equity is the amount of the home that you own, and the higher your equity and the lower your LTV, the better the home loan rate you're going to get from your mortgage lender.

Sources:

Yahoo loans
Avatar Financial glossary
Seattle Government Housing Glossary

About the Author

Emily Kerr is a freelance writer with over 425 articles in print. She writes about topics from home financing to home construction.

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