What does LTV (loan-to-value ratio) mean in real estate or for mortgages?

The LTV (loan-to-value ratio) of a home is a way to compare the loan amount on a property with the property’s value. Lenders commonly use LTV to determine what interest rates they’re willing to offer you.

How is LTV calculated?

To calculate LTV, just divide your loan balance by your property’s value. For example:

• Imagine you put 10% down on a $100,000 house
• Since you’re putting down $10,000, you would need a loan amount of $90,000 on a house valued at $100,000
• Dividing $90,000 by $100,000 would give you a LTV of 0.90 or 90%.

Why does LTV matter?

Generally speaking, borrowers with lower LTVs will qualify for lower rates. This is true whether you’re buying a house or whether you’re refinancing your home.

Lenders tend to charge higher rates when they think there’s more risk, and borrowers who have lower LTVs are perceived to be less risky loans because they have a higher percentage of equity in their house.

If you’re buying a home and have over an 80 LTV ratio (i.e., if you are putting less than 20% down), many lenders will require that you carry and pay for private mortgage insurance (PMI) in addition to your monthly principal and interest payments.

How do I change my LTV?

Since the LTV ratio depends only on loan amount and property value, your LTV will change whenever the loan amount changes or when the property value changes. So your LTV will get lower when you pay down your mortgage or when your property appreciates in value.

Here are some example scenerios:

Example A:   Loan pay down without home appreciation

• Years ago, John bought and put 20% down on a $100,000 home.
• With an initial loan amount of $80,000, John’s starting LTV is $80,000 / $100,000 = 0.80 (or 80%).
• Even though the house hasn’t appreciated in value (it’s stayed at $100,000), John has been paying his loan regularly and now only has $50,000 of principal left to pay on his mortgage.
• Since his loan balance is now $50,000, his LTV is now $50,000 / $100,000 = 0.50 or 50%.

Example B:   Loan pay down with home appreciation

• Let’s assume the same situation as above, but now John’s home has appreciated from $100,000 to $200,000 during the same period
• With $50,000 left on his mortgage, John’s LTV today would be $50,000 / $200,000 which is 0.25 (or 25%), which is much lower than the 0.50 (or 50%) from before.

Check out the SoFi difference

Whether you’re refinancing or buying, SoFi offers competitive rates across a range of LTVs. Put as little as 10% down, or refinance to new terms or rates. Either way, you’ll enjoy competitive rates with a fast and easy application.

What is PMI (private mortgage insurance)?

PMI is a type of mortgage insurance which, when you purchase a home, is usually required on conventional loans when your down payment is less than 20%. PMI is different than other types of insurance in that it protects the lender, not the homeowner.

How much does PMI cost?

PMI rates vary. The rate will depend on the percentage of your down payment, your credit score and the PMI company. Rates generally range from 0.55% to 2.25% of your original loan amount – or $550 – $2,250 for every $100,000 borrowed.

For example, if you buy a home for $500,000 and put 10% down on a 30 year, fixed rate mortgage, and have a credit score of 700, you might pay about $207 per month for PMI.* This is in addition to your monthly payment of principal, interest, taxes and hazard insurance!

If there’s any silver lining at all with PMI, it’s that you usually don’t need to carry it for the entire life of your mortgage loan. Lenders are required to automatically cancel PMI on a conventional loan for your primary residence when your loan-to-value ratio reaches 78%. Or, you can request to stop paying PMI once your loan balance reaches 80% of your original property value.

Types of PMI

Each type comes with its own advantages that suit various situations. Choosing the right one can put you in an ideal home buying position.

1. Borrower-paid (BPMI) – The most common type and is often known simply as “PMI.” It is the “default” type of PMI, and the payment is tacked on top of your regular mortgage payment.

2. Lender-paid (LPMI) – The lender “pays” your mortgage insurance for you, that payment is factored in when a lender calculates what interest rate to offer.

3. Single premium – Allows you to pay the insurance premium as an upfront lump sum, eliminating it as an additional monthly payment.

4. Split premium – The least common type of PMI, allows you pay a portion of the insurance as a lump sum at closing. The remaining amount is then paid as borrower-paid additional monthly installments.