Few real-world phrases are more confusing than those found in mortgage terminology. However, you'll benefit from learning the lingo and the concepts associated with financing a house. Among the most important of these terms is "loan-to-value," a ratio that represents the relationship between the amount you owe on a home and the home's value. Lenders care about your home's LTV because it indicates the equity in your home and your risk of default. Like mortgage lenders, you can calculate LTV using a projected loan amount and a home's current market value.
Calculating the Loan Portion of LTV
The "loan" aspect of the LTV ratio refers to a single mortgage loan. It's the amount you borrow to cover the price of the home, minus any down payment you contribute when buying a home. When refinancing, it's the amount you plan to borrow to pay off a current mortgage and cover your closing costs, if any. For example, if you were to buy a $200,000 home making a 20-percent down payment, your loan amount would be the difference between $200,000 and $40,000. You calculate the down payment using this equation: $200,000 * 0.2. The full equation is: $200,000 - ( $200,000 * 0.2 ) and results in a loan amount of $160,000.
Figuring Out Home Value
Finding out a home's current market value requires you to estimate value based on comparable home sales. However, lenders usually rely on professional appraisal reports to determine value. Only certain refinance transactions, known as streamline refinances, may not require a home appraisal. Otherwise, an independent, third-party appraiser evaluates the home's interior and exterior condition and its features, compares it to similar homes, and comes up with an opinion of value. This value acts as the point of comparison for the LTV ratio.
Loan Amount Divided by Value
Divide the loan balance needed for your purchase or refinance by the estimated or appraised value of the home. For example, the equation for a $200,000 home purchase with a 20 percent down payment is: $160,000 / $200,000. The loan to value ratio is 0.8, or 80 percent LTV. On a purchase, you can also subtract the down payment percentage from 100 percent to get the LTV.
When calculating loan-to-value for multiple mortgages on a home, you have a combined loan-to-value, or CLTV. Add up the loan amounts for all first mortgages and second mortgages, including home equity lines of credit and home equity loans. Then, divide the total of all loans by the home's value to get the CLTV.