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What is loan-to-value ratio?
The loan-to-value ratio is the amount of the mortgage compared with the value of the property. It is expressed as a percentage. If you get an $80,000 mortgage to buy a $100,000 home, then the loan-to-value is 80%, because you got a loan for 80% of the home's value.
From the lender's standpoint, a mortgage with a high loan-to-value ratio is more risky. Most mortgages with loan-to-value ratios above 80% require mortgage insurance. People in the mortgage biz call loan-to-value "LTV" for short.
How we got here
What’s behind the numbers in our loan-to-value calculator
This calculator helps you unlock one of the prime factors that lenders consider when making a mortgage loan: The loan-to-value ratio. Sure, a lender is going to determine your ability to repay — including your credit score, payment history and all the rest. But most likely, the first thing they look at is the amount of the loan you’re requesting compared to the market value of the property.
An LTV of 80% or lower is most lenders’ sweet spot. They really like making loans with that amount of LTV cushion, though these days most lenders will write loans with LTVs as high as 97%.
Let’s see how your LTV shakes out.
What a loan-to-value calculator does
The NerdWallet loan-to-value mortgage calculator uses an easy, step-by-step process:
To begin, input:
The type of loan you’re considering: purchase, refinance, etc.
The purchase price of the home
And how much of a down payment you’re willing to make
Your loan-to-value ratio will be instantly calculated. Anything in the 80% to 90% range or lower and you’re golden. If you’re in the 90%-97% range, it’s still a doable loan — you’ll just want to shop even harder to get your best interest rate.
How to use a loan-to-value mortgage calculator
It’s all about walking into a lender, or applying online, with all you need to know to get the best terms possible. And calculating your loan-to-value will help you decide:
The loan term that works best for you. A 30-year fixed-rate loan will allow more affordable monthly payments, but you’ll pay a lot more interest over time. A 15-year fixed-rate mortgage means you pay less interest over the life of the loan — your interest rate will be lower, too — but your monthly payment will be considerably higher.
If an adjustable-rate mortgage might be a good option. If you have a high loan-to-value, you might be able to lower your interest rate by considering an ARM. This can be especially suitable for home buyers who plan on being in a home for only a few years.
Am I trying to buy too much house? A high loan-to-value may mean you’re trying to buy more house than your down payment allows. Scaling back a bit on your dream home can make your down payment go farther and lower your LTV.
How much of a down payment should I make? It’s a good question to ponder. If your LTV is below 80%, you won’t have to pay mortgage insurance. That can save you quite a bit of money.
Mortgage borrowing 101
What are the prime factors that lenders consider?
Loan-to-value is just one element lenders look at when deciding whether an applicant will qualify for a loan. It is definitely among the most important, but other factors include:
Credit score. Your credit score not only provides a benchmark for qualification, but it is also the criteria on which a lender will decide your interest rate. The higher your score, the lower your interest rate. And of course, it works the other way, too: a lower score will mean you pay a higher rate.
Down payment. The bigger your down payment, the more attractive you’ll seem to a lender. It means it will take less risk in lending you the money to buy a home. That’s why loan-to-value plays such a major role in lending decisions.
Cash flow. The amount of money you have left over at the end of the month — after paying your recurring debts and expenses — is a key indicator of your ability to repay a mortgage.
Liquidity. Having money in the bank, in the form of savings or investments, lets the lender know that you can not only pay the closing costs required to complete a loan but have a cash cushion necessary for homeownership expenses, as well.
What to do if your loan-to-value is too high
Having a high loan-to-value ratio is not as big of a deal as it used to be. As we’ve mentioned, some conventional loans, as well as loans backed by the FHA, allow 97% LTVs — and USDA and VA loans are issued with 100% LTVs all the time. But besides the exceptions, generally, a higher LTV means a higher interest rate.
Here are some things to consider if you have a high loan-to-value ratio:
Can you make a bigger down payment? Saving so that you can put more money down, or getting help from family members to make a larger down payment, may not always be an appealing option, but you’re likely to get better loan terms.
Downsize your dream home. Buying less home will make your down payment go farther and lower your LTV. You can always blow out a few walls and add upgrades later.
Try to clear at least the 80% LTV hurdle. Mortgage insurance premiums usually kick in if your LTV is below 80%. If you’re close, try to make up the difference so that you clear the 80% mark. You’ll save a good deal of money in the long run.