What is loan-to-value ratio (LTV)?

Loan-to-value ratio is a number, expressed as a percentage, which describes the relationship between a loan amount and the value of the asset securing the loan; such as a car or house. It is an assessment of lending risk, and is one of the factors your lender may consider before approving a loan application.

How does LTV affect my loan?

LTV is used to determine how much risk a lender will be assuming if they decide to lend to you. In general, loan assessments with higher LTVs are considered higher risk. It is even possible for you to be denied the loan if the LTV is too high. The lower your LTV, the less risky your mortgage application appears to lenders.

LTV is just one factor lenders use when evaluating a loan or determining the interest rate you will pay. Other factors include the current market rate, your credit score, collateral type and more.

LTV ratio may also determine if you need to purchase private mortgage insurance on a home loan. Private mortgage insurance protects the lender or titleholder if you default on the loan, pass away or are otherwise unable to meet the contractual obligations of the mortgage.

How can I lower my LTV?

Determining LTV is a straightforward mathematical calculation. You divide the loan amount by the value of the asset, then multiply by 100 to get the percentage. For instance, if you borrow $270,000 to buy a home with an appraised value of $300,000, your LTV will be .09. Multiply that by 100 to determine the percentage, 90 percent.

270,000/300,000=0.9

0.9*100=90

Over time, your LTV should go down as you pay on the loan and/or the asset’s appraised value rises—as is often the case with houses.

When an LTV ratio is greater than 100 percent, the buyer is considered “underwater” on the loan. In other words, you owe more on the asset than the asset is worth. This situation is more common with cars than homes because cars lose value over time and homes—generally speaking—gain value. But it can happen on a home loan, as well.

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