Reader question: “I am trying to figure out what my LTV ratio is going to be, to see if I will need to get PMI coverage. How do I calculate the loan-to-value on a mortgage? Is it just the amount borrowed in relation to the appraised value of the home? Or is it more complex than that.”
You’ll find the calculation instructions below. But first, I want to offer a quick definition for readers who aren’t familiar with this subject:
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 home you are buying. Example: I’m purchasing a home that costs $250,000. I have a down payment of 50k, so I need a loan of $200,000 to cover the remainder. This would create a loan-to-value ratio of 80%, because 200K is 80% of 250K. 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).
How to Calculate Loan-to-Value Ratio on Your Mortgage
To calculate the loan-to-value ratio on a mortgage, you would simply divide the loan amount being borrowed (for home buyers) or the current loan balance (for homeowners) by the current appraised value of the home.
So it looks like this: Loan Amount ÷ Current Appraised Value = LTV
For instance, if I have a loan in the amount of $200,000, and the property is valued at $250,000, my LTV ratio would be 80%. The math in this scenario would look like this: 200,000 ÷ 250,000 = 0.8 (or 80%).
The process is slightly different for home buyers (purchase loans) and homeowners who are refinancing. But the general concept is the same.
- Purchase: To calculate loan-to-value ratio on a purchase mortgage, a home buyer would divide the amount being borrowed (not counting the down payment) by the appraised value.
- Refinance: Homeowners can calculate their current loan-to-value by dividing the amount they currently owe on the loan by the appraised market value of the home. Example: If I currently owe $150,000 on my mortgage, and the appraiser says my home is worth $180,000, then my LTV ratio would come out to 83% (150,000 / 180,000 = 0.83).
So you’re right on the money. LTV is just the amount borrowed (or currently owed) in relation to the appraised value of the home. That’s really all there is to it. As you can see, it’s fairly easy to calculate the loan-to-value ratio of any mortgage. All you need are these two key ingredients, then it’s simple math.
In most cases, the value comes from an appraiser’s report. The bank / lender will have the property appraised to determine how much it is worth in the current market. Once they have the appraisal amount, they would simply compare it to the loan in order to calculate the LTV ratio, using the math shown above.
PMI Usually Required When LTV is Above 80%
You’re right about the PMI requirement too. A home loan that accounts for more than 80% of the market value will probably require private mortgage insurance, or PMI. Stated differently, anything with an LTV above 80% typically requires PMI. This is why a lot of borrowers put down at least 20%, when they can afford to do so. It eliminates the need for mortgage insurance and therefore lowers the total cost of the loan over time, as well as lowering the monthly payments.
You might also avoid PMI by combining two loans, each with a LTV below 80%. This is commonly referred to as “piggybacking,” since you are putting one mortgage on top of another. The 80-15-5 piggyback is a good example. This is where the home buyer has one loan for 80% of the purchase price, a second one for 15% of the price, and a down payment that covers the remaining 5%. Since neither product has a loan-to-value above 80%, PMI is not required in this scenario. But we are getting off subject here.
To calculate loan-to-value, you simply divide the amount being borrowed by the price or appraised value of the home. Shift the decimal point two places to create a percentage. This percentage is your LTV ratio. Done!