Estimating your potential monthly mortgage payments involves calculating various financial factors. A loan-to-value (LTV) ratio represents one of the fundamental measurements home buyers will want to know before deciding how much home they can afford, taking out a home equity line, or refinancing into a better economic position. Your loan-to-value ratio is one of several factors that will indicate your level of risk to a lender as a home buyer, which impacts the rates and terms you can qualify for. Luckily, the Home Loan Expert team is here to show you how a loan-to-value calculator can be useful when coming up with a financial plan of action for taking out a home loan.
What is a Loan-to-Value Ratio?
In a loan-to-value ratio, the “l” (loan) represents the size of the mortgage and the “v” (value) represents the appraised property value of your home dwelling. An LTV shows the relationship between these two variables expressed as a ratio. This ratio matters because it will determine the down payment a home buyer will be required to put down when purchasing a home. The lower your LTV ratio, the better—this means you own more equity in your home.
Why Does Your Loan-to-Value Ratio Matter?
Your LTV ratio is an important factor when you are considering refinancing your home. As a homeowner, you will want to fall within an LTV range of 80% or less when looking to refinance. An LTV ratio of 80% or less indicates that you own 20% of your home. Homeowners who do not fall within this range will usually be required to purchase private mortgage insurance (PMI) to mitigate the higher risk on the loan and pay higher interest rates. This is where the general rule of 20% comes from when making a down payment on a home during the origination purchase date. Furthermore, a greater variety of loan types are available to home buyers with better LTVs.
Additionally, your LTV ratio will indicate how much equity (the portion of a home’s current value that the owner actually possesses at any given time) you have built into your home. You begin building equity into your home as soon as you make your down payment, and increase your equity as you make monthly payments over time (once they are applied towards the principal balance on your home).
Homeowners with enough built-in equity are then able to leverage it in the form of collateral to secure either a home equity loan, a traditional home equity line of credit (HELOC), or a fixed-rate HELOC. So clearly, your LTV ratio matters significantly when it comes to setting yourself up to be in the best financial position possible as a homeowner.
How is your Loan-to-Value Ratio Calculated?
There are several inputs that are calculated to determine your LTV ratio. When using an LTV calculator, you will want to be able to provide the following values:
- Current Appraised Value (or Market Value of Your Home). This is how much the home is worth at market value or price.
- Outstanding Balance on First Mortgage. This is the amount that remains on the loan, which will be impacted by the principal balance and interest rate, as well as other costs and fees.
- Second Mortgage or Home Equity Loan Balance. This input will look at if you took out a second mortgage using your home’s built-in equity.
- Property Liens Balance. This could apply to homeowners who have taken out tax liens, mechanics liens, or other types of lien loans.
So for example, home buyers who are interested in purchasing a property for $250,000 (the value or “v”) and are able to take out a loan for $225,000 (the loan or “l”) will have an LTV of 90%.
Expressed as an equation, this looks like $225,000/$250,000, or,
$225,000 ÷ $250,000 = .9
.9 expressed as a percentage (.9 x 100) is 90%.
This means the home buyer will need to produce a house deposit for the remaining 10%, or $25,000.
To avoid paying private mortgage insurance and to get better terms on a loan, the home buyer will want to reach an LTV of 80% or lower. If the value of a home is appraised at $250,000, then the home buyer would need to establish 20% equity to achieve an LTV of 80% (or lower). This means the loan amount ÷ $250,000 = .8
Or, this value can be calculated by multiplying the property’s appraised value by 20% (.20) to get the total figure on a house deposit, meaning $250,000 x .20 = $50,000
For some home buyers, a 20% down payment, may not be possible through personal financing. However, there are other ways to come up with a down payment, like down payment assistance programs or first-time buyers’ benefit programs.
When Should I be Concerned About my Loan-to-Value Ratio?
Apart from having an LTV that does not fall within a range of 80% or less, homeowners will also want to watch out for a negative LTV. Somewhat counter-intuitively, a negative LTV would have a percentage that exceeds 100%.
An LTV that exceeds 100% means that as a homeowner, you have negative equity in your house. This creates a situation of having an underwater mortgage, which could lead to defaulting on a loan and eventual foreclosure. It is vital that home buyers be aware of their LTV ratio in relation to how much equity they have built.
How Can The Home Loan Expert Help?
The Home Loan Expert team is made up of professional, friendly lending Experts comprised of members from the same communities we serve. Our customer-focused platform has allowed us to expand our lending operations nationwide so we’re better able to serve more home buyers. Our personalized, face-to-face customer service ensures that our clients’ needs are seen and heard throughout the entire loan process.Calculating your loan-to-value ratio is fundamental to determining your monthly costs and deciding how much house you can afford. While a calculator is a great tool for estimating how your LTV will affect your monthly payments, consulting with a lending Expert can give you a more clear idea of what to expect. We can also address any questions or concerns you may have. So call us today at (866) 221-1926 to find out more about how your LTV ratio can affect your monthly payments, or reach out through our online chat service at any time.