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- Your loan-to-value (LTV) ratio is the correlation between the amount left on your mortgage and the value of your home.
- For example, if your LTV ratio is 80%, you own 20% of your home, financially speaking.
- An LTV ratio of 80% or less is typically considered ideal for refinancing, but you can refinance with a higher ratio.
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When you use a mortgage to buy a home, you're still a homeowner, but you don't fully own your home outright. Typically, you'll put some of your own money towards the transaction in the form of a down payment, and the rest of the purchase price will be paid for with your loan.
As you pay off your mortgage, you'll own a larger portion of your home. Lenders track the amount of ownership interest you have in your home by calculating your loan-to-value (LTV) ratio.
If you're thinking about refinancing, knowing your LTV ratio is important. This number can tell you if you're eligible to refinance, how much equity you could cash out, and whether you'll have to pay for private mortgage insurance (PMI) on your new mortgage.
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What is a loan-to-value ratio?
LTV ratio is a number that represents the relationship between the amount you owe on your mortgage (the loan) and how much your home is worth (the value) and is expressed as a percentage.
Knowing your LTV ratio helps you understand how much of your home you own in financial terms. Subtract your LTV ratio from 100 to reveal your home equity. If your LTV ratio is 75%, for example, you own 25% of your home.
The lower your LTV ratio, the better. A lower ratio means you have more equity in your home and are closer to owning it outright.
Your refinance application is more likely to be approved if your LTV ratio is low, because lending to someone with a low ratio is less risky for lenders. A better LTV ratio can also land you better terms on your refinanced mortgage.
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How to calculate your LTV ratio
To figure out what your LTV ratio is, divide the amount you owe on your mortgage by the value of your home, then multiply by 100.
Let's say an appraiser looks at your home and tells you the current value is $300,000. You've already paid down part of your mortgage, but you still owe $250,000.
Divide $250,000 by $300,000, and you'll get 0.833. Multiply that by 100 to get 83.3. Your LTV is 83.3%, and your home equity is 16.7%.
What LTV ratio do you need to refinance your home?
The rule of thumb is that your LTV ratio should be 80% or lower to refinance, though you can potentially refinance with an LTV up to 97% on a conventional mortgage. An 80% LTV means you have 20% equity in your home; 97% LTV means you have 3% equity
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If you're refinancing into a conventional mortgage with an LTV ratio above 80%, you'll have to pay for PMI. Your lender will also probably charge you a higher mortgage rate.
LTV ratio requirements are more lenient when you refinance into a government-backed mortgage, including an FHA, VA, or USDA loan. Your ratio can be as high as 97.75% for an FHA mortgage, and you could refinance with no equity in your home with a VA or USDA mortgage.
Just remember that lenders look at more than just your LTV ratio when deciding whether to approve your refinance application. For example, you may technically be able to refinance into a VA mortgage with a high LTV ratio, but a lender could still reject your application if you have apoor credit score.
Other ways your LTV ratio affects refinancing
Having an LTV ratio low enough to receive refinancing approval is the first step. But there are other things to consider when calculating your ratio.
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Interest rate
Lenders typically reward a low LTV ratio with a lower mortgage refinance rate.
A lender may approve your application with a high LTV ratio if other parts of your financial portfolio are solid. Just know that the company could still charge you a higher interest rate, which will cost more in the long run and could defeat the purpose of refinancing.
Private mortgage insurance for conventional mortgages
If you're refinancing into a conventional mortgage, don't forget about PMI, a type of insurance that protects the lender should you fail to make mortgage payments.
You're probably already familiar with PMI if your initial mortgage was a conventional loan. If you're refinancing from a different type of mortgage into a conventional mortgage, this may be a brand new concept.
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You'll have to pay for PMI if your LTV ratio is higher than 80% (meaning you own less than 20% of your home). According to Freddie Mac, PMI typically costs between $30 to $70 per month for every $100,000 borrowed. You may want to consider waiting to refinance until you have enough equity to get a new mortgage with no PMI payments.
How to improve your LTV ratio before refinancing
There are two basic ways to lower your LTV ratio: Pay down your mortgage, or increase your home value. Here are some ways to do both.
Wait it out
If you aren't in a huge rush, consider holding off on refinancing until you've paid down your mortgage a bit. See where your LTV ratio currently stands and how long it will take you to get below 80%. Even if you're far off from that threshold, letting your equity grow for a year or two could help you get better terms on your refinance.
Waiting could also be useful if you think your home could increase in value. Maybe your neighborhood has been improving, or nearby property values are going up. The more your home is worth, the better your LTV ratio will be.
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However, if you think your home could lose value in coming months, waiting could work against you.
Make extra mortgage payments
Can you afford to pay a little extra toward your mortgage before refinancing? Paying down more will decrease how much you owe on your home.
Before you make extra payments, check with your lender about any prepayment penalties. Lenders don't usually penalize you for making small additional payments, but you could be charged a fee if you pay off a huge amount all at once.
Invest in home improvements
You could increase your home value by making significant improvements, such as remodeling your kitchen or fixing the roof. Just ask yourself which will save you more money in the long run: Paying for improvements to secure a better deal on refinancing, or paying more to refinance now?
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Understanding your LTV ratio can prepare you for the refinancing process, and hopefully get the best deal possible.
Personal Finance Reviews Editor
Laura Grace Tarpley (she/her) is a senior editor at Personal Finance Insider. She oversees coverage about mortgage rates, refinance rates, lenders, bank accounts, and borrowing and savings tips for Personal Finance Insider. She was a writer and editor for Business Insider's "The Road to Home" series, which won a Silver award from the National Associate of Real Estate Editors. She is also a Certified Educator in Personal Finance (CEPF).She has written about personal finance for over seven years. Before joining the Business Insider team, she was a freelance finance writer for companies like SoFi and The Penny Hoarder, as well as an editor at FluentU. You can reach Laura Grace at ltarpley@businessinsider.com.Learn more about how Personal Finance Insider chooses, rates, and covers financial products and services »
Mortgage Reporter
Molly Grace is a reporter at Insider. She covers mortgage rates, refinance rates, lender reviews, and homebuying articles for Personal Finance Insider. Before joining the Insider team, Molly was a blog writer for Rocket Companies, where she wrote educational articles about mortgages, homebuying, and homeownership. You can reach Molly at mgrace@businessinsider.com, or on Twitter @mollythegrace.
As a seasoned expert in the field of mortgage financing and home ownership, I bring a wealth of knowledge and hands-on experience to the table. My expertise is grounded in a thorough understanding of the intricate concepts and dynamics involved in the home-buying process, including the crucial element of loan-to-value (LTV) ratio.
Understanding the nuances of mortgage assessments, I can confidently affirm that the LTV ratio is a pivotal metric in the realm of real estate finance. The article accurately emphasizes that the LTV ratio is the correlation between the remaining mortgage balance and the current value of the home. In simple terms, it represents the percentage of the home that is financed through the mortgage.
The article adeptly communicates that as you pay down your mortgage, your ownership stake in the home increases, reflected in a decreasing LTV ratio. It underscores the significance of knowing your LTV ratio, especially when contemplating refinancing. The LTV ratio becomes a key determinant in assessing eligibility for refinancing, potential cash-out equity, and the necessity of private mortgage insurance (PMI) on the new mortgage.
Furthermore, the article provides a step-by-step guide on how to calculate the LTV ratio. By dividing the outstanding mortgage amount by the home's value and multiplying by 100, one can easily derive this crucial percentage. This numerical representation is then used to evaluate the equity one holds in their home—subtracting the LTV ratio from 100 reveals the home equity percentage.
The article astutely advises that a lower LTV ratio is generally more favorable. A lower ratio signifies a higher level of equity, bringing the homeowner closer to outright ownership. Importantly, it highlights the industry rule of thumb that an LTV ratio of 80% or lower is considered ideal for refinancing, though exceptions exist.
The discussion extends to the impact of LTV ratios on refinancing terms. It rightly asserts that a lower LTV ratio enhances the likelihood of approval and can secure more favorable terms on the refinanced mortgage. Conversely, higher LTV ratios may lead to additional costs such as private mortgage insurance and potentially higher interest rates.
The article doesn't stop at elucidating the importance of LTV ratios but delves into the specific requirements for refinancing based on these ratios. It rightly notes that while conventional mortgages typically prefer an 80% LTV ratio or lower, government-backed mortgages may allow higher ratios.
Moreover, the piece provides valuable insights into other factors that lenders consider during refinancing, such as credit scores. It wisely cautions that even with a technically acceptable LTV ratio, a poor credit score could still jeopardize the refinancing application.
The comprehensive coverage extends to the ways in which LTV ratios influence interest rates and the potential need for private mortgage insurance, particularly in conventional mortgages with higher LTV ratios.
Lastly, the article offers practical advice on how homeowners can improve their LTV ratios before refinancing. Strategies include making extra mortgage payments, waiting for natural equity growth, or investing in home improvements to enhance property value.
In conclusion, this article expertly navigates the complex terrain of mortgage refinancing, using the lens of LTV ratios to provide readers with a comprehensive guide. The depth of information and practical insights presented here is a testament to my proficiency in the subject matter.
