Published:September 2, 2022 Modified:November 3, 2022
Loan to value ratio

What Is Loan To Value Ratio?

Financial institutions and other lenders assess the loan-to-value (LTV) ratio as a gauge of the lending risk prior to accepting a mortgage. Loans with high LTV ratings are often thought to be riskier. If the mortgage is approved, the loan will therefore have a higher interest rate.

A loan with a high LTV ratio may also require the borrower to purchase mortgage insurance in order to lower the risk to the lender. Private mortgage insurance is called PMI (private mortgage insurance).

APV/MA is the LTV ratio.
where MA is the mortgage amount
and a PV is an appraised property value.

Loan-to-value ratio Process

A cash-out refinance, which lets you keep the extra cash and swaps your current mortgage for a bigger loan, may also let you figure out how much money you might be able to borrow. Let’s say you’re putting in an application for a cash-out refinance program with the standard 80% LTV ratio ceiling. First, determine the highest sum you may get from a $300,000 home cash-out refinance loan:

$300,000 multiplied by 0.80 is the maximum cash-out loan amount of $240,000.

You would have $40,000 in cash left over after fully paying down your $200,000 mortgage, which you could utilize for other things like covering college costs or a significant home improvement project.

Loan To Value Ratio Formula?

You can calculate loan-to-value ratios by dividing the loan amount by the property’s appraised value. You would divide $180,000 over $200,000 to achieve your LTV of 90%, for instance, if a lender gave you a loan for $180,000 on a house that was appraised for $200,000 instead.

Here is a diagram that better illustrates the calculation:

LTV ratio = LA/APV.

The loan amount is LA, while appraised property value is APV.

 

 

Prospective Home

Appraised property value

$200,000

Loan amount

$180,000

Calculation

$180,000/$200,000 = 0.9

LTV

90%

The LTV in this instance is fairly high, indicating a bigger risk to the lender. Mortgage insurance and higher interest rates could be associated with a 90% LTV.

Loan To Value Ratio for Refinancing

One of the most crucial elements affecting your ability to refinance is your LTV ratio. For instance, your lender might be less willing to approve a refinance application if the LTV ratio is higher than 80%. As a result, you might have to pay additional fees and mortgage insurance.

Your LTV ratio also influences how much you pay in interest. The lowest mortgage refinances rates are often unavailable to homeowners refinancing with high LTVs.

One of the variables that influence your capacity to refinance is the LTV ratio. Other significant elements that affect the APR and monthly payment of your loan include:

  • Debt-to-income (DTI) ratio
  • Credit score
  • Employment history
  • Repayment period (i.e., 30 years vs. 15 years)
  • Refinance (no cash out) or refinance with cash out

Loan To Value Ratio for Commercial Real Estate Financing

Loan-to-value ratios for loans on commercial real estate loans are often established at 75% or 80%. For real estate, a maximum LTV of 75% might be permitted, although an LTV of up to 80% is typically acceptable for multifamily projects.

For more information on our financing services please contact Hub City Lending and we will get you on the path to financial success.

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