Quick overview

Loan-to-Value (LTV) measures how much of a property’s value is financed. It’s one of the simplest — and most important — metrics lenders check when deciding pricing, insurance requirements, and whether to approve a mortgage.

(For official guidance on mortgage insurance and lender practices, see the Consumer Financial Protection Bureau and the U.S. Department of Housing and Urban Development.)

How is LTV calculated?

The LTV formula is straightforward:

LTV = (Loan Amount / Appraised Property Value) × 100

Example: If the home’s appraised value is $300,000 and the loan is $240,000, then:

LTV = (240,000 / 300,000) × 100 = 80%

Note: Lenders may use the lower of appraisal or purchase price for purchase loans. For refinances, they typically use a new appraisal or automated valuation model.

Why LTV matters for mortgage options

  • Pricing: Higher LTVs indicate greater lender risk and usually attract higher interest rates.
  • Mortgage insurance: Conventional loans commonly require Private Mortgage Insurance (PMI) when LTV is above 80%. See our guide to Private Mortgage Insurance (PMI) for details and removal triggers.
  • Loan types and eligibility: Different loan programs have different acceptable LTV limits. FHA loans, VA loans, and USDA loans each have unique rules for down payments and insurance (or funding fees). For government program specifics, refer to HUD and the VA.
  • Refinancing: LTV determines whether you can refinance into a conventional product without mortgage insurance or qualify for cash-out refinances.

Authoritative sources: Consumer Financial Protection Bureau (CFPB), U.S. Department of Housing and Urban Development (HUD), Fannie Mae and Freddie Mac guidance.

Practical examples and what they mean

  • 80% LTV: Generally the threshold where conventional loans avoid PMI and borrowers get better rates. Many borrowers aim for this target.
  • 90–95% LTV: Common for low‑down‑payment programs; expect higher rates and a mortgage insurance requirement for conventional loans.
  • >100% LTV: Occurs with negative equity or when a borrower owes more than the home is worth; options become limited and may require modification or specialized programs.

Common scenarios

  • First-time buyers with 5% down: LTV ≈95% — likely need PMI and will pay a higher rate.
  • Homeowners refinancing to take out equity: A cash‑out refinance increases LTV; staying at or below certain LTV thresholds (often 80% for conventional products) helps avoid added costs.

See our deeper discussion on refinancing when LTV is near thresholds: Refinancing Strategies When Your LTV Is Near Thresholds.

Strategies to lower or manage LTV

  • Increase your down payment: The most direct way to reduce LTV at purchase.
  • Boost the property value: Cost-effective renovations or verified upgrades can raise appraised value before refinancing.
  • Choose alternative structures: Piggyback loans or lender credits can avoid upfront PMI in some cases — learn more in our piece on Mortgage PMI Alternatives.
  • Pay down principal faster: Extra payments reduce the loan balance and lower LTV over time.

Common mistakes and misconceptions

  • Mistake: Thinking LTV is fixed. It changes with loan balance and property value. Market appreciation or paying down principal affects it.
  • Misconception: High LTV equals no options. Some loan programs and lenders serve high-LTV borrowers, though often at higher cost.

Quick checklist before you apply

  • Verify the likely LTV with an estimated appraised value.
  • Ask lenders how they calculate value (appraisal vs. purchase price vs. AVM).
  • Compare the cost of paying PMI vs. alternative strategies.

Professional tips from practice

In my work advising buyers and refinancers, I prioritize a realistic LTV target (often 80% or lower for conventional financing) and model both the monthly and long‑term costs of mortgage insurance. Small changes in down payment or interest rate can materially affect lifetime interest paid.

Resources and further reading

Disclaimer

This article is educational only and does not replace personalized advice from a licensed mortgage professional or attorney. Loan terms and program rules change; confirm details with lenders and official program materials before acting.