- You will need the home's appraisal value and the amount of the mortgage to calculate the loan-to-value ratio. To calculate, divide the appraised value of the property by the actual mortgage amount. For example, if the appraisal value is $100,000 and the mortgage amount is $80,000, then the LTV would be .80 or 80 percent loan-to-value.
- According to Zillow.com, 80 percent is usually considered a high loan-to-value ratio. To a lender, a high LTV indicates that the loan is a higher risk; usually, different conditions or stipulations are applied to the loan. Zillow notes that in the past, before the mortgage crisis of 2009, loans could be found with LTVs that were up to 125 percent. That means that mortgages would be greater than the worth of the home, so if the owner defaulted and the property was foreclosed, the bank would lose even more money. Zillow adds that as of 2011, high-risk loans like those are difficult to find.
- A high LTV can cause you to have different terms on a mortgage loan than borrowers with lower LTVs would have. According to Lending Tree, most borrowers who take out a mortgage with an LTV of over 80 percent are required to pay for private mortgage insurance or a mortgage insurance premium. Mortgage insurance is used by banks and lenders as protection against default or foreclosure. Homeowners must usually pay for five years, or in some cases until the LTV drops below 80 percent. Zillow adds that the higher the loan-to-value ratio, the higher the interest rate on the mortgage note.
- Low loan-to-value ratios are what to shoot for, as they can help you get better terms on a loan. According to Zillow, LTVs below 80 percent are considered low. For banks, this means the borrower is a better or safer risk, earning lower loan interest rates for those borrowers. Lending Tree notes that it is a good idea to keep LTV ratios in mind when shopping for a home to be aware of interest rates and potentially higher costs.
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