Loan-to-Value (LTV) Ratio Formula
The LTV ratio formula compares your loan amount to the property value.
Learn how LTV affects mortgage approval, PMI, and interest rates.
The Formula
The Loan-to-Value (LTV) ratio expresses your loan as a percentage of the property's value. Lenders use it to assess risk: a higher LTV means the lender is financing more of the property, which increases their exposure if you default.
Variables
| Symbol | Meaning | Unit |
|---|---|---|
| LTV | Loan-to-Value ratio | % (percentage) |
| Loan Amount | The amount you are borrowing from the lender | $ |
| Appraised Property Value | The independently assessed market value of the property | $ |
Example 1 — Standard Home Purchase
You buy a home appraised at $400,000 and put down $80,000 (20%).
Loan Amount = $400,000 − $80,000 = $320,000
LTV = ($320,000 / $400,000) × 100
LTV = 80% — exactly at the standard threshold. No PMI required.
Example 2 — Low Down Payment
Same $400,000 home, but you only put down $20,000 (5%).
Loan Amount = $400,000 − $20,000 = $380,000
LTV = ($380,000 / $400,000) × 100
LTV = 95% — PMI will almost certainly be required, and interest rates may be higher.
LTV Thresholds to Know
- LTV ≤ 80% — The ideal threshold. Most lenders offer the best rates and no PMI requirement.
- LTV 81–90% — Generally approved, but PMI is typically required and rates may be slightly higher.
- LTV 91–95% — Higher PMI costs, stricter lender requirements.
- LTV > 95% — Difficult to get conventional financing; typically requires FHA or special programs.
- LTV > 100% — Underwater (you owe more than the property is worth). No lender will refinance without special programs.
What is PMI?
PMI (Private Mortgage Insurance) protects the lender — not you — if you default. It is typically required when LTV exceeds 80% on a conventional loan. PMI costs approximately 0.5%–1.5% of the loan amount per year. Once your LTV drops below 80% (through payments or rising property value), you can usually request PMI cancellation.
When to Use It
- Before applying for a mortgage — to know whether you will need PMI
- When refinancing — to determine if you qualify for better rates
- For home equity loans — lenders typically require a combined LTV under 85%–90%
- To understand how much equity you have built in your property