What Is LTV? Why Loan-To-Value Ratio Matters

The loan-to-value ratio, or LTV, measures the size of the mortgage on a property relative to that property's value. LTV is one of the key elements lenders consider when you apply for a mortgage, mortgage refinance or home equity loan or line of credit (HELOC). LTV is one way that lenders assess risk. Generally, lenders consider a lower LTV to be safer, which means that a comparatively low LTV could help you get a lower interest rate.

LTV is usually expressed as a percentage. Calculating a loan-to-value ratio is fairly simple, though you can make it even easier by plugging numbers into a loan-to-value calculator.

To calculate the loan-to-value ratio, divide the cost of the mortgage by the home’s current value. For example: Say a house is purchased at $400,000, and the mortgage totals $360,000.

The loan to value would be 90%: $360,000 / $400,000 = 0.9. Where did that other 10%, or $40,000, go? That would be the amount of the down payment in this example.

Loan-to-value ratio is one element mortgage lenders look at as they evaluate your finances and consider the terms on which they'll approve your home loan. The lower your loan-to-value ratio is, the less risky you seem to a lender because you've got more equity.

Home equity is the part of the home that you own — the property's value minus the amount you still owe. Having a lower LTV could help you score a lower interest rate.

» MORE: Ways to get a lower mortgage rate