What is an LTV Ratio and Why Does it Matter?

LTV is the Loan-to-Value ratio comparing the balance of your mortgage loan to the value of your home.

There are so many acronyms to keep straight in the home buying process. LTV is one of the most important and the most complicated.

San Diego mortgage

LTV – or Loan-to-Value – is important to understand in order to make sure you are getting the best mortgage product for your financial needs.

LTV is the ratio created by comparing the value of your loan against the value of your home. In other words, it’s the comparison between the amount of money a homeowner is borrowing against the home’s appraised value.

Why is the LTV Ratio Important?

The LTV ratio comes into play during both a home purchase and a refinance but the ratio can vary depending on the appraised value of the home. That is key.

  • If the borrower is borrowing more money than the appraised value of the home, an LTV of over 100%, they are considered to be “upside down” on their mortgage.
  • San Diego borrowers with higher LTVs usually will pay more in their interest rate. They are viewed as a higher risk borrower and by charging more, the lender protects themselves against potential loss due to default.

LTV and Private Mortgage Insurance (PMI)

This ratio will also determine whether you have to pay private mortgage insurance every month. For conventional loans, borrowers who want to avoid paying private mortgage insurance should make a down payment of at least 20% of the home value. Federal Housing Administration (FHA) purchase loans will allow you to have a loan-to-value ratio of up to 96.5 percent.

When it Comes to LTV – Lower is Better