Definition:
Loan to value is a ratio comparing the value of your mortgage loan(s) and the value of the subject property (home). Loan to value is used by lenders to access the risk against the amount of money they are lending on a property.
Calculation:
Loan to value is calculated differently based on whether the mortgage is from a purchase or is a refinance.
Purchase:
Loan to value is calculated by dividing the mortgage loan amount by lesser of the sales price or appraised value. Take a look at the illustration below:
Example #1:
Sales price: $250,000
Appraised value: $260,000 Loan Amount / Sales Price = LTV
Loan Amount: $230,000 $230,000 / $250,000 = 92%
Example #2:
Sales price: $260,000
Appraised value: $250,000 Loan Amount / Appraised Value = LTV
Loan Amount: $230,000 $230,000 / $250,000 = 92%
Refinance:
Loan to value is calculated by dividing the mortgage loan amount plus any other existing liens by the appraised value.
Example #1:
New Loan Amount: $250,000 New Loan Amount / Appraised Value = LTV
Appraised Value: $300,000 $250,000 / $300,000 = 83.33%
Example #2:
New Loan Amount: $250,000
Existing Lien: $20,000 New Loan Amount / Appraised Value = LTV
Appraised value: $300,000 $250,000 + $20,000 / $300,000 = 90%
The next time you are in the process of securing a new mortgage loan. Keep these calculations in mind. When your lending professional explains that you cannot exceed a loan to value of 80% you will know what they are talking about, and how they are figuring the numbers.