How is loan-to-value ratio calculated?
Loan-to-value ratio, or LTV ratio, is used by lenders to determine how much you are borrowing in relation to the collateral for the loan. LTV ratio is usually used in reference to home mortgages.FormulaThe formula for calculating the LTV ratio is the amount of the loan divided by the value of the home. For example, if you took out a $180,000 mortgage on a $230,000 house, you would divide $180,000 by $230,000 to find that the loan-to-value ratio was about 78 percent.EffectsThe lower your LTV ratio, the less risky your loan appear to lenders, because you have more equity in the home. FHA loans can be issued with an LTV ratio as great as 97 percent.SignificanceIf your LTV ratio exceeds 80 percent, you usually are required to pay for private mortgage insurance, or PMI. Lenders must cancel PMI when your LTV ratio falls to 78 percent, but you can request it to be canceled when it drops to less than 80 percent.Time FrameYour LTV ratio will decrease over time as you pay off your loan. Most of
