Loan-to-Value Explained and How to Calculate It

When you're applying for a mortgage, refinancing your home or taking out a home equity loan, one number plays a big role in what you can borrow and what it will cost: your loan-to-value (LTV) ratio. LTV compares how much you're borrowing with how much the property is worth. It helps lenders decide how risky the loan is and whether you will need to pay extra costs such as mortgage insurance.

In this guide, we explain how LTV works, how to calculate it, what counts as a good LTV ratio, and how it affects loan terms across mortgages, auto loans and home equity products. We also cover what can influence your LTV and how to improve it over time.

Key points

• LTV ratio compares your loan amount to your property's appraised value and helps lenders assess lending risk.
• Lower LTV ratios may lead to better loan terms, including lower interest rates and no mortgage insurance requirements.
• LTV ratios vary by loan type, with conventional loans allowing up to 97% LTV and government-backed loans reaching 100% LTV.

What is the Loan-to-Value (LTV) ratio?

The loan-to-value (LTV) ratio is a measure comparing the amount you are financing with the appraised value of the property. The higher your down payment, the lower your LTV ratio. Mortgage lenders may use the LTV to decide whether to lend to you and determine if they will require private mortgage insurance or use of a loan guaranteed or insured by the government, such as an FHA loan.

Lenders also use the LTV to determine how much you can borrow and the interest rate you will be offered. Higher-risk borrowers with a higher LTV will usually be offered a higher interest rate, while you may be able to get a better interest rate with a larger down payment.^[1]

How to calculate the Loan-to-Value (LTV) ratio?

Calculating your loan-to-value ratio is straightforward using a simple formula. The basic loan-to-value ratio formula is:

• Current loan balance ÷ Current appraised value = LTV

To find your current loan balance, you can check your monthly loan statement or online account. Here's how it works: if you have a loan balance of $140,000 and your home currently appraises for $200,000, your loan-to-value equation would look like this:

1. $140,000 ÷ $200,000 = .70
2. Convert .70 to a percentage, and that gives you a loan-to-value ratio of 70%.

A professional appraisal is an essential part of determining your loan-to-value ratio. If an on-site appraisal is needed, your lender will arrange for a certified appraiser to come to your home and estimate its value.^[2]

What is Loan-to-Value used for?

Lenders use the loan-to-value (LTV) ratio to help assess risk before approving secured loans, including mortgages, auto loans and home equity loans. The general concept is the same, as it compares the amount you are borrowing to the value of the asset. However, the way LTV is calculated or applied can vary slightly depending on the type of loan.

Mortgages

An LTV ratio is taken into consideration when applying for a mortgage and is often part of a lender’s requirements.

For conventional home loans, an LTV ratio of 80% or less allows you to avoid mortgage insurance, which can add tens of thousands of dollars to your payments over the life of your mortgage loan. Lenders generally consider higher LTVs to be riskier because their potential loss would be greater, so they often charge higher interest rates on mortgage loans with higher LTV ratios.

Some government-backed mortgages allow very high LTV ratios:

• FHA loans: Minimum down payment of 3.5%, resulting in an LTV ratio of 96.5%
• USDA loans: Don't require any down payment at all, allowing 100% LTV
• VA loans: Also available with no down payment required, allowing 100% LTV

These high-LTV loans typically require a form of mortgage insurance or include extra fees to offset the risk connected with their higher LTVs.^[3]

Auto loans

While the LTV ratio is a less-critical factor for auto loan finance compared to mortgages, it is still considered by auto lenders. While you may pay higher interest if you have a higher LTV ratio, there’s no threshold like the 80% LTV that earns the best mortgage terms.^[3]

The loan-to-value ratio is calculated by dividing the amount of your loan by the vehicle's actual cash value. Lenders use this formula when deciding whether to lend you money for a car or vehicle.

The higher the LTV or the higher percentage of the vehicle's value that you are borrowing, the riskier a loan is to a lender. You can lower the LTV by increasing your down payment, which will help reduce the size of your loan and may result in a lower interest rate from the lender.

A loan with a high LTV could be risky for you. If your loan exceeds the vehicle's value, you could end up owing more than the car is worth — a situation known as being “underwater” on the loan.^[4]

HELOCs and home equity loans

If you're taking out a home equity line of credit or home equity loan, the amount of available equity you have in your home plays an important role. Your equity helps your lender determine your loan-to-value ratio (LTV), which is one of the factors your lender will consider when deciding whether or not to approve your application.

For home equity products, lenders use a Combined Loan-to-Value (CLTV) ratio instead of standard LTV. CLTV includes all loans secured by your home, such as your existing mortgage plus the new home equity loan or credit line, while LTV only considers your primary mortgage. This gives lenders a complete picture of your total debt against your home's value.

For example, if you have a $140,000 mortgage balance and want a $25,000 home equity line of credit on a home appraised at $200,000, your CLTV would be 82.5%. Most lenders require your CLTV to be 85% or less for a home equity line of credit.^[2]

What is a good Loan-to-Value (LTV) ratio?

Generally, lenders prefer a loan-to-value (LTV) ratio of 80% or lower, as this represents a lower risk for them. However, the maximum LTV allowed can vary depending on the lender and the type of loan.

Lenders set LTV limits as part of their qualifying criteria. A higher LTV means you are borrowing a larger portion of the property’s value, which increases the lender’s risk because there is a greater chance the borrower could default on the loan. For this reason, borrowers with LTV ratios above 80% on conventional loans are typically required to pay private mortgage insurance (PMI) until they build more equity.

When shopping for a loan, it is worth asking lenders about the maximum LTV ratio they allow for the product you are applying for. You will usually find higher allowable LTVs on home purchases or rate-and-term refinances compared to cash-out refinancing.

The table below outlines typical maximum LTV ratios for several common loan programs, including conventional loans, FHA (Federal Housing Administration) loans, VA (Department of Veterans Affairs) loans, and USDA (U.S. Department of Agriculture) loans:

Source ^[5]

Loan-to-value ratio limits are subject to change, as lending guidelines for each loan program may be updated by the respective lenders.

By lowering your loan-to-value ratio, you'll pose less risk to a lender, which could improve your chances for approval and a less expensive loan.^[6]

How LTV ratio impacts your loan terms

An LTV ratio can affect several loan terms, including approval. Here are some of the terms that may be affected by LTV ratio:

Loan approval: A general rule of thumb is to aim for a loan-to-value ratio of 80% when applying for a loan, lowering your ratio could improve chances of approval.^[6]

Interest rates: Lenders often charge higher interest rates on mortgage loans with higher LTV ratios because they consider them riskier. A lower LTV could lead to a more favorable mortgage rate.^[3]

Mortgage insurance: Conventional loan lenders typically require you to carry mortgage insurance if your down payment is less than 20% and your LTV is greater than 80%.^[3]

Factors that can affect your LTV ratio

Several factors can influence your loan-to-value ratio over time, affecting your borrowing options and mortgage terms. Understanding these variables helps you manage your LTV strategically and potentially access better loan conditions.

• Down payment amount: The most direct way to impact your LTV is through your initial down payment – increasing your down payment automatically lowers your borrowing amount, making your loan payments more affordable.^[6]
• Property value changes: Market fluctuations can cause your property value to rise or fall, directly affecting your LTV ratio.^[7]
• Regular mortgage payments: As you pay down your mortgage principal over time through regular monthly payments, your loan balance decreases, which can lower your LTV ratio.^[2]
• Additional principal payments: Making extra payments toward your mortgage principal can reduce your loan balance more quickly and improve your LTV ratio.^[2]
• Purchase price or borrowing amount: Purchasing a lower-priced home or borrowing a smaller amount relative to the property value results in a lower LTV from the start.^[6]

Sources

1. Consumer Financial Protection Bureau. "What is a loan-to-value ratio and how does it relate to my costs?" https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-and-how-does-it-relate-to-my-costs-en-121/.
2. Bank of America. "How to Calculate Home Equity" https://www.bankofamerica.com/mortgage/learn/how-to-calculate-home-equity/.
3. Experian. "What Is Loan-to-Value Ratio and Why Is It Important?" https://www.experian.com/blogs/ask-experian/what-is-loan-to-value-ratio-and-why-is-it-important/.
4. Consumer Financial Protection Bureau. “What is a loan-to-value ratio in an auto loan?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-to-value-ratio-in-an-auto-loan-en-769/.
5. Rocket Mortgage. “What Is The Loan-To-Value Ratio And How Is It Calculated?” https://www.rocketmortgage.com/learn/loan-to-value-ratio.
6. Experian. "What Loan-to-Value Do Lenders Require?" https://www.experian.com/blogs/ask-experian/what-loan-to-value-do-lenders-require/.
7. Merrill. “Why calculating your home equity matters now” https://www.ml.com/articles/how-to-calculate-your-home-equity-and-why-it-matters.html.

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.

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