What Is Loan-to-Value Ratio?
In plain English
Loan-to-value ratio (LTV) is a percentage that compares the amount of a loan to the appraised market value of the asset used as collateral, most commonly a home. It is calculated by dividing the loan balance by the property value. Lenders use LTV to evaluate lending risk — a higher LTV represents greater risk. LTV directly affects interest rates, approval odds, and whether private mortgage insurance is required.
How Do You Calculate Your Loan-to-Value Ratio?
Divide your loan balance by the appraised value of the property, then multiply by 100. For example, borrowing $240,000 to purchase a $300,000 home results in an LTV of 80% ($240,000 ÷ $300,000 = 0.80). A 20% down payment achieves exactly 80% LTV, which is the threshold at which conventional lenders waive the requirement for private mortgage insurance (PMI). As you pay down the loan or the property appreciates, LTV decreases.
How Does LTV Affect Mortgage Approval and Interest Rates?
Lenders view high LTV loans as riskier because borrowers have less equity and are statistically more likely to default. Loans above 80% LTV on conventional mortgages typically require PMI, adding 0.2–2% of the loan amount annually to your costs. Higher LTV can also result in higher interest rates. At LTV above 97%, options narrow significantly. A lower LTV — achieved through a larger down payment — leads to better rates, no PMI, and stronger approval odds.
How Does LTV Apply to Home Equity Borrowing?
For home equity loans and HELOCs, lenders look at combined loan-to-value (CLTV) — the total of your first mortgage plus the new home equity debt divided by the home's value. Most lenders cap CLTV at 80–85%, leaving at least 15–20% equity in the home untouched. As your home appreciates or your mortgage balance falls, CLTV improves, potentially giving you access to more equity borrowing if needed.
Frequently asked questions
When can I remove PMI from my mortgage?
For conventional loans, you can request PMI removal when your LTV reaches 80% based on original value or a new appraisal showing appreciation. Lenders must automatically cancel PMI when LTV reaches 78% based on the original amortization schedule. FHA loans have different rules — MIP may be required for the life of the loan depending on your down payment.
What is considered a good loan-to-value ratio?
LTV below 80% is the standard benchmark for avoiding PMI on conventional mortgages. LTV under 70% is generally associated with the most favorable rates and terms. For refinancing, lenders generally prefer LTV at or below 80%. Higher LTV is sometimes accepted with stronger compensating factors like excellent credit or significant cash reserves.
Keep exploring
Related terms
Home Equity Loan
A home equity loan lets you borrow against the equity in your home as a lump sum at a fixed interest rate. Your home serves as collateral, making it a secured loan.
HELOC
A HELOC (home equity line of credit) is a revolving credit line secured by your home's equity. You draw funds as needed and pay variable interest only on what you use.
Amortization
Amortization is the process of paying off a loan through regular scheduled payments over time. Each payment covers both interest and a portion of the principal balance.
Debt-to-Income Ratio
Your debt-to-income ratio compares your monthly debt payments to your gross monthly income. Lenders use it to assess whether you can afford to take on more debt.
Auto Loan
An auto loan is a secured installment loan used to purchase a vehicle. The car serves as collateral, which typically results in lower interest rates than unsecured debt.