What is the Loan-to-Value Ratio?
Loan-to-Value Ratio, or LTV Ratio, measures the difference between the value of a home and the outstanding amount of the loan. A lower downpayment typically results in a higher LTV ratio, and the longer a homeowner is making payments on the loan, the lower the LTV ratio will become.
What is Your LTV Ratio?
A Loan-to-Value Ratio is in the form of a percentage, out of 100. You can calculate your LTV Ratio by taking the remaining outstanding balance of your mortgage and dividing it by the value of your home. For example, if your home is valued at $300,000 and you owe a remaining $200,000 on your mortgage, your LTV is 67%.
Why do Banks use LTV for Mortgages?
The LTV measurement for new mortgages is used to determine a few things, including the initial estimate of how much money a lender is willing to loan. A high LTV may indicate that:
- The homeowner is required to have Mortgage Insurance
- The loan is considered “risky” and banks may charge a higher interest rate
However, it’s important to note that credit unions operate differently than banks. At People’s Community Federal Credit Union, for example, all members get the same rate regardless of the LTV on the home loan.