Understanding Your Loan-To-Value (LTV) Ratio and Its Impact on Your Finances

Whether you're just starting the home purchase process, about to close on a home, or already enjoying homeownership, understanding your Loan-To-Value (LTV) ratio is essential. It significantly impacts your finances and mortgage options. Let's break down how to calculate your LTV and how it affects your mortgage.

Key Takeaways

• What is my Loan-To-Value Ratio (LTV)?

• How do I calculate my LTV?

• How does my LTV impact my mortgage insurance fees?

• How does my LTV impact my refinancing options?

What is My Loan-To-Value (LTV) Ratio?

Your LTV ratio tracks your progress in paying off your mortgage compared to your home's current value, showing how much equity you've built up. There are three main ways to build equity: paying off your mortgage, your home increasing in value, or both. The more equity you have, the lower your LTV ratio.

How Do I Calculate My LTV?

To calculate your LTV, start with your loan amount. For example, if you're buying a home valued at $300,000 with a $15,000 down payment, your loan amount is $285,000. Divide this by your home's value of $300,000

That gives you a loan to value ratio of 95%.

$285,000 / $300,000 = 95%

This is your LTV at the beginning when you first close on your mortgage.

Now, let's say after 3 years of making monthly payments of $1,100 toward the principal, you've paid off $39,600. Your new loan amount is $245,400. ($285,000 - $39,600) If your home's value has increased to $315,000, your new LTV ratio is:

$245,400 / $315,000 = 77.9%

Awesome, your LTV ratio has dipped below 78%! Why is that important?

Loan-To-Value Ratio (LTV) & Mortgage Insurance

If you put down less than 20% when getting your mortgage, you'll likely have to pay monthly mortgage insurance fees.

As you pay off your loan and your LTV ratio decreases, you may be able to remove these fees. When your LTV reaches 80%, you can request to have your mortgage insurance fees removed, often requiring a home appraisal.

At 78% LTV or lower, these fees should be automatically removed—except for FHA loans, where mortgage insurance typically remains for the life of the loan unless you refinance into a different loan product.

That’s one reason why some homeowners choose to refinance down the line, so they can change out of an FHA and into a different type of loan to get rid of those insurance fees.

Disclaimer: The guidelines surrounding these rules have changed in the past and they may change again, so make sure you talk to your mortgage advisor, as they should have the most updated information for you.

Loan-To-Value Ratio (LTV) & Refinancing Your Mortgage

Your LTV is crucial when considering refinancing. The more equity you have, the lower your LTV, and the better your refinancing options. Typically, to get a great deal on your refinance, you need to have built up equity in your home. An LTV of 80% or higher might make refinancing more challenging.

Loan-To-Value Ratio (LTV) Summary

• Your LTV tracks how much of your mortgage you’ve paid off compared to your home's current value.

• The more equity you have, the lower your LTV will be.

• Once you reach an LTV of 80%, you can request to have your mortgage insurance fees removed. At 78% LTV or lower, these fees should fall off automatically (except for FHA loans).

• When refinancing, a lower LTV gives you better options and chances for a great deal.

For the most updated information and personalized advice, always talk to your mortgage advisor.