Loan-to-Value Ratio or LTV

The loan-to-value ratio (LTV ratio) is calculated by dividing the loan balance of a property by the market value and is expressed as a percentage.

LTV = Balance of Loans/Market Value

For example, a property with a loan balance of $300,000 and a market value of $400,000 has a Loan-to-Value Ratio of 75%.

Lenders may require mortgage insurance on loans with a loan-to-value ratio greater than a predetermined amount, usually 80%. This means that the purchaser of a property will need to put a minimum of 20% down to avoid paying mortgage insurance premiums.

The Loan-to-Value Ratio is also used when an investor wishes to refinance a property. For example, you have owned an investment property for a number of years and you would like to refinance the property to take cash out. Most lenders will allow a maximum of 75% of the appraised value for the new loan amount. Lenders who refinance at Loan-to-Value Ratios greater than 75% will usually charge less favorable interest rates.

The Loan-to-Value Ratio can be used to estimate the amount of equity you have in a property. If the LTV for a property is 75%, your equity position in a property is 100 minus 75 or 25%. You can then multiply .25 times the market value to determine the equity amount.

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