Loan To Value For An Property
When applying for a home loan , mortgage or refinancing a property, one crucial term you’ll encounter is the Loan to Value ratio, commonly known as LTV. Understanding this concept is essential, as it significantly affects your chances of approval, interest rates, and the terms of your loan.
What is Loan to Value for a Property?
The Loan to Value ratio, or LTV, is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. In the context of real estate, it compares the size of your mortgage loan to the value of the property you’re buying or refinancing.
“Loan to Value for a property is the ratio between the mortgage amount and the appraised value or purchase price of the home, whichever is lower.”
Formula:
Loan to Value (LTV)=(Loan Amount Property Value)×100\text
{Loan to Value (LTV)} = \left( \frac{\text{Loan Amount}}{\text
{Property Value}} \right) \times 100
Illustration: Understanding LTV with an Example
Let’s say you’re planning to purchase a home valued at ₹500,000 and you have $100,000 available as a down payment.
Loan amount: ₹400,000
Property value: ₹500,000
LTV=(400,000500,000)×100=80%\text
{LTV} = \left( \frac{400,000}{500,000} \right) \times 100 = 80\%
In this case, your Loan to Value for the property is 80%.
This means you are borrowing 80% of the home’s value and contributing 20% as a down payment.
Loan to Value for a Property and Its Effect on Mortgage Insurance
Exact Phrase: “If the Loan to Value for a property exceeds 80%, most lenders will require private mortgage insurance.”
PMI protects the lender if you default on the loan, not the borrower. It can add significant costs to your monthly mortgage payment. Once your LTV drops below 80%, you can usually request the removal of PMI.
What is a good Loan to Value ratio?
A good LTV is generally 80% or less. This qualifies you for better interest rates and exempts you from private mortgage insurance in most cases.