What is LTV?
Loan-to-Value (LTV) Ratio is an assessment used by lenders to determine the risk involved with granting a mortgage to the home buyer.
LTV is also used by lenders to see if they can manage to get you to borrow back the principal and down payment monies you've already paid out (line of credit or home equity loans).
How is LTV calculated?
To calculate LTV, you add up all mortgages and liens against the property, and then divide that result by the estimated value of the property.
For example, if the total owed on the property is $120,000, and the market value of the property is $150,000, the LTV would be equal to $120,000 ÷ $150,000. This would result in an LTV of .80, or 80%.
What Do the Numbers Mean?
A Loan-to-value Ratio of 80% or lower is usually needed to secure a mortgage. LTV ratios above 80% usually require the buyer to purchase Private Mortgage Insurance (PMI) to be approved for a mortgage.
If you have an existing home loan and you've been required to pay PMI (Private Mortgage Insurance), it might pay to keep a close watch on your LTV. Once it drops below 80%, you might be able to get your lender to drop the PMI requirement.
However, you may be required to pay to have an appraisal done on your home before your lender will allow you to drop the PMI. But be forewarned, paying for the appraisal does not guarantee that you'll be permitted to drop PMI.