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Your loan-to-value ratio can affect whether you get approved for a loan, how much you may need for a down payment, and even the interest rate you pay. Understanding loan-to-value (LTV) helps you make smarter borrowing decisions when buying a home or vehicle.

What is loan-to-value (LTV)?

Loan-to-value is a ratio lenders use to compare the amount being borrowed to the value of the item being purchased. The most common loans that use loan-to-value are mortgages or auto loans.

How is LTV Calculated?

Loan-to-value = (Loan Amount/Appraised Value) X 100

Real-world example: If you buy a $300,000 home and borrow $240,000, your loan-to-value ratio is 80%.

($240,000 ÷ $300,000) × 100 = 80%

Lower LTV ratios reduce risk for lenders and can help consumers qualify for better loan terms. The maximum loan-to-value will vary depending on the type of loan and lender requirements.

How to Lower Your LTV

Saving up for a down payment will help you lower your LTV. To estimate how much you should save, look at the value of the item you are purchasing.

• For houses – Estimated values for homes near the size you need, in the style you want, and around the area you’d like can be found through online listings. Places like Zillow.com are helpful to see current listings.
• For cars - Search JD Power for an estimated value of the specific make, model, and year of the vehicle you would like to purchase.

These resources will not give the exact number, but having an estimated value gives you a realistic savings goal. Once you have your estimated value, multiply the value by the recommended down payment percentage to find out how much you should save for a down payment.

If the amount you end up with for an estimated down payment does not seem like a reasonable goal, there are a couple of options.

• Research options offered by your lender for lower down payment. Make sure to ask what the differences in interest and fees might be.
• Find a lower cost vehicle or home to purchase. Could you get the same vehicle used, or is there a similar car available for less? Is there another area close to where you want to be that is not as expensive? If you find something that is less expensive, it will also require a lower down payment amount.

Buying a Car Without a Down Payment

Lenders may allow borrowing up to 100% or above the vehicle value to account for additional coverages such as Guaranteed Asset Protection or Repair Warranties. Even though borrowers may be able to finance without a down payment, the same rule-of-thumb holds true – the more money put down to begin with, the lower loan-to-value, the better the interest rate will be.

Buying a Home Without 20% Down

It is common to finance a house with less than 20% down. In this case, the interest rate may be higher, and the lender may require Private Mortgage Insurance (PMI). As you pay down the mortgage and build equity, you may be able to have PMI removed. Many opt for this route to get into the housing market faster to beat the rising home prices.

Federal Housing Administration loans require only a 3.5% minimum down payment and are more flexible with credit score qualifications. FHA loans also require mortgage insurance premiums (MIP). If your down payment is less than 10%, MIP is typically required for the life of the loan. With a down payment of 10% or more, MIP is generally removed after 11 years.

In an ideal situation, a 20% down payment unlocks better interest rates and provides equity in the home from the start. However, many people don’t have access to that amount of money. There are down payment assistance programs available to make home ownership possible for more families who may not be able to get a down payment on their own.

Can High LTV Prevent Refinancing?

There are some cases where lenders finance beyond the normal LTV guidelines. Financing with this LTV often comes with higher interest rates because it is a riskier loan and may make it difficult to refinance the loan. If possible, paying extra on the loan to decrease the amount owed may open the opportunity to refinance once the LTV has been sufficiently decreased.

No matter what your goal is, lowering your loan-to-value is always a good idea. If you need help running the numbers or exploring your options, MembersAlliance offers free financial counseling at every branch and online financial calculators to help you create a plan for your financial goals.