How to Maximize Your Loan-to-Value (LTV) Ratio When You Borrow
December 18, 2022
Lenders consider several factors when determining whether or not an individual is eligible for a loan and how much. One of the most critical factors is loan-to-value (LTV), which lenders utilize to aid in the loan approval process. Loan-to-value comes into play most often when potential homebuyers seek a mortgage. But it is also typically calculated for any sizeable monetary loan.
Knowing your LTV ratio for mortgage purposes or another type of loan is essential — so is being aware of what a good loan-to-value balance is. And finally, possessing the knowledge of how to maximize LTV when borrowing can often result in more favorable terms. Borrowers should consider the following when evaluating LTV.
What Is the Loan-to-Value (LTV) Ratio?
Put simply, the ratio is calculated as a percentage. To determine the loan-to-value mortgage ratio, lenders consider the amount an individual seeks to borrow compared to the cost of the item being purchased, for example, the mortgage loan amount compared to appraised value of the home. The lower the ratio, the more favorable the loan terms are likely to be. If the loan-to-value ratio is high, there may be difficulty in securing the loan. For other types of loans, the LTV is determined using the borrower’s collateral secured against the loan.
Ultimately, the loan-to-value ratio will be considered when determining several components related to borrowing. These include the interest rate on the loan, the down payment if it is a mortgage, and whether private mortgage insurance (PMI) is also required.
What Is a Good Loan-to-Value Ratio?
Evaluating the loan-to-value LTV ratio is not tricky. A borrower simply needs to know the amount of the proposed loan and the appraised value of the home or collateral. The loan amount is divided by the appraised value. As an example, a loan-to-value mortgage ratio is calculated in the following manner:
A home is appraised at $900,000. The borrower is offering a $180,000 down payment. Subsequently, the loan amount will be $720,000. The loan amount divided by the appraised value equals 80%.
The criteria lenders use to determine a good loan-to-value ratio will typically vary from lender to lender. A loan-to-value mortgage ratio might also vary for different types of mortgages. However, as a general rule of thumb, anything 80% and under is considered good. But, as stated above, the lower the LTV, the more favorable the loan terms are likely to be.
How to Maximize LTV When Borrowing
Lenders are often able to offer more advantageous terms with a lower LTV because it signifies less risk. Borrowers with a high net worth and the ability to show definite long-term liquidity also generally pose less risk. Different types of assets, such as cryptocurrency and securities, can also significantly affect the LTV ratio. However, not every lender will accept those asset classes as collateral. That’s why knowing the requirements of specific lenders and how LTV will affect borrowing is essential.
Researching lenders first is an essential step in maximizing LTV. As stated above, lenders may have slightly different loan requirements and determining LTV. Borrowers with a general idea of their loan-to-value mortgage ratio or general LTV can then decide which lender is right for their situation.
Borrowers who wish to lower their loan-to-value mortgage ratio can simply put more money toward a down payment. The more money that is available for a down payment, the better the LTV ratio will be.
For other types of loans, the assets used as collateral can play a significant role in the LTV ratio. Lowering the LTV by combining different types of assets, such as other properties, securities, or items considered luxury assets, is often possible.
Ultimately, while lowering the LTV will significantly aid in receiving favorable loan terms, it is still possible to secure a loan with a high LTV. Many lenders offer high LTV loans, but generally, a lower LTV is better from both the borrower’s and lender’s perspectives. Borrowers who can demonstrate high liquidity or collateral assets will typically be able to lower the LTV ratio and save significantly over the life of the loan.