What is loan to value, and how does it affect me?

Question: "I have been reading up on home mortgages lately, and the term loan to value comes up a lot. Could you explain what this means, and how it affects me during the home-buying process?"

Loan-to-value ratio (or LTV for short) is a comparison between the amount of money you're trying to borrow, and the appraised value of the house you're buying. For example, let's say I'm purchasing a home that costs $250,000. I have a down payment of 50k, so I need a loan of $200,000 for the remainder. This would be a loan-to-value ratio of 80%, because 200K is 80% of 250K. Does that make sense so far?

This term is often used to describe the limits on a particular loan. For example, if you hear a lender say that the LTV limit is 85%, it means that you can only borrow 85% of the home's value (for that particular loan program).

Here's another rule of thumb you should know about. If you borrow more than 80% of a home's value, you will probably have to buy private mortgage insurance as well. This is why many people try to put at least 20% down on a home purchase -- it helps them avoid PMI expenses. Here's another way to avoid that extra cost.

This article answers the question: What is loan-to-value, and how does it affect me? If you have additional questions about the home-buying process, financing or credit, be sure to do a search at the top of this page. There's a lot of information on this website, and that's the easiest way to find it.