What is a Good Loan-to-Value Ratio?
When it comes to the ABCs of purchasing or refinancing a home, you’re bound to hear a lot about LTV, among other things. Acronyms can be overwhelming in the financial world, but LTV – loan-to-value ratio – is simple to figure out and understand as it relates to your goals.
The calculation of the LTV is just what it sounds like: the ratio between the amount you want a loan for and the value of the property. That percentage is how a lender assesses the risk of the mortgage, in addition to other factors. The amount of that ratio also determines interest rates and whether mortgage insurance will be required, which both impact your monthly payment.
To break it down with an example:
- The home purchase price or value is $250,000.
- The down payment is $50,000, making the mortgage $200,000.
- Divide the loan amount ($200,000) by the value ($250,000) = 0.8, which is an 80% LTV.
In the case of a refinance, the down payment is the equity you’ve built in the home that you’re rolling back into a new mortgage, whether for a better interest rate, cash-out, etc.
So, what is a good loan-to-value ratio? As with the above example, you’ll typically see 80% being the golden number that many lenders look for. However, a higher LTV ratio doesn’t rule out getting a loan or refi at all.
The Federal Housing Authority (FHA) requires a minimum 3.5% down payment or a 96.5% LTV. A Veteran’s Administration loan can be a full 100% LTV, and many lenders will look at 97% depending on the full borrower profile.
What Does 80% Loan-to-Value Mean?
While many banks and lenders consider 80% LTV to be the minimum requirement to avoid adding private mortgage insurance (PMI) to the loan, it’s not required by law. The commonly accepted practice is to add insurance to reduce their risk for loans with over 80% LTV, however some lenders – like Titan Financial (Titan) – have programs that go up to 90% LTV with zero PMI requirements. Other exceptions for the adding mortgage insurance with higher LTV may be considered by lenders with mitigating circumstances such as low debt, higher income or investment portfolios.
If PMI is included, significantly increasing the monthly payment, it can potentially be eliminated as the home equity grows pushing the LTV below the 80% bar. Borrowers often find that refinancing to a lower interest rate and dropping the PMI when the required threshold is met, can save thousands.
Another acronym to be aware of when contemplating a new mortgage is DTI – debt-to-income ratio. In addition to loan and property value, lenders will look at factors like the amount of your current debt compared to your monthly income. Along with a strong credit rating, if your monthly cash flow and take-home pay are manageable, there may be more flexibility on the loan-to-value ratio requirements.
If you’re still in the decision-making stage of a refinance, you’ll find lots of loan-to-value ratio calculators online to get a general, preliminary idea of your numbers. You can also call us at Titan to explore your individual circumstances and long-term goals – it’s easy as ABC and 123!