The amount of money borrowed on a loan.
If you’re considering refinancing your mortgage, the amount of available Glossary Term: equity you have in your home plays an important role. Your home equity is the difference between the Glossary Term: appraised value of your home and your current mortgage balance(s). The more equity you have, the more refinancing options available to you.Your equity helps your lender determine your Glossary Term: loan-to-value ratio (or LTV), which is one of the factors your lender will consider when deciding whether or not to approve your application. It also helps your lender determine whether or not you’ll have to pay for Glossary Term: private mortgage insurance (PMI). To avoid PMI, your LTV typically needs to be 80% or less.
Current Loan Balance ÷ Current Appraised Value
For example: You currently have a loan balance of $140,000 (you can find this number on your monthly loan statement or online account). Your home currently appraises for $200,000. So your loan-to-value equation would look like this:
$140,000 ÷ $200,000 = .70
Convert .70 to a percentage, and that gives you a loan-to-value ratio of 70%.
If your lender’s guideline for an allowable refinance loan amount is 80%, then you would meet that requirement in this example.
If you want to refinance and you have an excellent credit score and a low amount of outstanding Glossary Term: debt, your lender may allow you to refinance at a higher loan-to-value ratio. Some loans may be available for up to 95% of the appraised value of the home.
Another way to impact your loan-to-value ratio is by protecting the value of your home by keeping it neat and well maintained.
Now that you know how to calculate your loan-to-value and combined loan to value ratios and how you can impact them, you can make more informed choices to help you reach your financial goals, whether you choose to borrow from the equity in your home, refinance, or simply continue to pay down any current home loan balances.