LTV (Loan-to-Value Ratio)

LTV measures how much of the home's value you're borrowing. If a home is worth $300,000 and you're borrowing $240,000, your LTV is 80% (240 ÷ 300 = 0.80).

LTV is the flip side of your down payment. A 20% down payment means an 80% LTV. A 5% down payment means a 95% LTV.

Lenders care about LTV because it represents risk. A higher LTV means the buyer has less equity in the home, and more risk for the lender if the buyer defaults.

LTV affects your mortgage terms in several ways. High LTV ratios often require private mortgage insurance (PMI). Lenders may charge higher interest rates for higher LTV loans. And the maximum LTV varies by loan type (conventional, FHA, VA).

As you pay down your mortgage and/or the home appreciates, your LTV decreases. Reaching 80% LTV on a conventional loan typically allows you to request PMI removal, saving money on your monthly payment.

A buyer puts 5% down on a $280,000 home, borrowing $266,000. Their LTV is 95%. They're required to pay PMI. Two years later, they've made payments and the home has appreciated to $305,000. Their loan balance is now $253,000, giving them an LTV of approximately 83%. They're getting closer to 80%, at which point they can request PMI removal.

"LTV only matters when I buy."

LTV matters for refinancing, too. Lenders evaluate LTV when you refinance, and a lower LTV typically gets better terms. LTV also determines when you can drop PMI and affects your ability to take out a home equity line of credit.