What is Loan to Value Ratio?
A question we are commonly asked by people looking to borrow a Home Equity Loan or Line of Credit is…what is Loan to Value Ratio? People notice the terminology in advertising disclosures and elsewhere, but often don’t know what it means.
Calculating Loan to Value Ratio
Loan to Value Ratio (LTV) quite simply is a tool banks use to determine how much equity a borrower has in their home. LTV is calculated by taking the outstanding balance somebody has on their mortgage and dividing it by the value of their home.
If you owe $150,000 on your mortgage and your home is worth $200,000, your LTV would be 75%. Meaning you still owe 75% of the homes value but you have 25% ownership or equity in your home.
Most banks require LTV’s to be lower than 80 – 85%. So, if a bank has a maximum LTV of 85%, that means you cannot owe more on your mortgage plus what you are borrowing for your Home Equity and have that amount total more than 85% of your home’s value.
Using our $200,000 home value example, an 85% LTV would be $170,000. Based on that you could borrow an additional $20,000 on top of the $150,000 you still owe.
The Bottom Line
This is one of several credit criteria a bank will look at when evaluating a loan application, but hopefully it is now one you better understand.
If you have more questions, visit our HomeLine page or if you’d like to speak with someone, give us a call at (717) 733.4181