There are a number of terms that you just can’t escape when researching owning homes, mortgages, and loans. “Loan to value” ratio is one of them. That said, it’s also one that a lot of people don’t understand. Have no fear, in this post we will thoroughly but quickly explain the loan to value ratio, and let you know what it means to you as a prospective or current homeowner!
First, let’s start by going over what the loan to value ratio is. The simplest way to describe it is with a quick math equation:
Loan to Value % (LTV) = Mortgage Loan Amount / Property Value
In short, as you can see above, we’re calculating a percentage that explains how big your mortgage is relative to your home’s current market value. The lower the ratio, the more of the money tied up in your home is YOURS (equity).
When you are buying a home, the Loan to Value Ratio (based on the down-payment you plan to make) is one of the factors that determines your interest rate.
If you already own a home, the loan to value ratio shows how much equity you have in your home. This, in turn, can be used to determine whether or not you may be able tap into your home equity with a cash out refinance, for example. Or, you might want to know the LTV ratio if you’re considering moving.
The number one thing to remember about the LTV ratio is that the lower it is, the less debt you have!