Several factors influence your mortgage refinance rate and monthly payment. Your loan-to-value (LTV) ratio is one of the most important.
This metric compares your current mortgage balance to the appraised value of your home, and it helps the lender determine whether or not you qualify for a refinance loan.
What is a loan-to-value (LTV) ratio?
Your loan-to-value ratio compares the amount of your mortgage to the market value of your home. It’s expressed as a percentage.
When refinancing your home loan, mortgage lenders use your LTV ratio to calculate your home equity and establish your maximum borrowing limit. If your LTV ratio is higher than 80%, you’ll need to pay private mortgage insurance (PMI) until you reach that 80% threshold.
How to calculate your LTV ratio
You can calculate your LTV ratio by dividing your mortgage balance by your home value:
Loan balance ÷ home appraisal value x 100 = LTV ratio
For example, if your mortgage balance is $200,000 and your property value is $250,000, your LTV ratio would be 80%.
Use a loan-to-value calculator to help you dive into the numbers.
Calculating your combined LTV ratio (CLTV)
If you also have a home equity loan or a home equity line of credit (HELOC), be sure to combine both loan amounts to accurately calculate your combined loan-to-value ratio (CLTV).
For instance, say you have a mortgage balance of $200,000 and a home equity loan of $25,000. Your property value is $300,000. With the combined total of your loans, your CLTV ratio would be 75%.
Using LTV to waive private mortgage insurance
In addition to calculating your current LTV ratio, you can use this metric to estimate your maximum borrowing amount with a refinance and avoid private mortgage insurance. For instance, to meet the 20% equity threshold, you can multiply your home value by 0.8 (80%).
Home value x 0.8 = maximum loan amount: For a $300,000 property, your total loan balance can be no more than $240,000. Otherwise, you’ll be stuck paying mortgage insurance until you reach 80% LTV.
How does your LTV affect your refinancing?
Your LTV ratio is one of the most important factors that impact your ability to refinance. For example, your lender may be more hesitant to accept a refinance application with an LTV ratio above 80%. You might end up paying higher fees and mortgage insurance as a result.
Your LTV ratio also helps determine your interest rate. Homeowners refinancing with high LTVs usually don’t qualify for the lowest mortgage refinance rates.
The LTV ratio is only one of several factors that affect your ability to refinance. Some other important factors that impact your loan APR and monthly payment include:
- Debt-to-income (DTI) ratio
- Credit score
- Employment history
- Repayment period (i.e., 30 years vs. 15 years)
- Standard refinance (no cash out) or a cash-out refinance
LTV ratio requirements
There are several mortgage refinancing options available to you. Refinancing requirements, including the maximum LTV ratio, vary by program.
However, having the following LTV ratio for your desired loan type can help you qualify for better rates and potentially allow you to waive mortgage insurance premiums.
Fannie Mae and Freddie Mac's conforming loan limits allow a maximum 95% LTV ratio for a standard (no cash-out) refinance on a single-family home. But, if you seek a cash-out refinance, your maximum LTV drops to 80%. The threshold is lower for second homes and investment properties.
The requirements for a home equity loan and HELOC are similar to a cash-out refinance, though some lenders may only require 15% equity or 85% CLTV. Still, to qualify for the best interest rates, you’ll want to aim for a CLTV ratio of 80% or less.
How to improve your LTV ratio before refinancing
There are several ways to lower your LTV ratio:
- Pay down your mortgage. Your LTV ratio will go down over time as you make your mortgage payments. You can speed up this process by making extra payments toward your principal balance.
- Wait for your home value to increase. A good home location, healthy economy, and strong buyer demand can help boost your home value over time. Waiting for your home to appreciate might be your best option for lowering your LTV ratio if you don’t have the cash to make extra loan payments.
- Perform home improvements. Completing repairs and certain home improvements can boost your home’s curb appeal and appraised value. Some of these projects, such as solar panels, may also be eligible for tax credits.
- Pay closing costs upfront. Setting aside some cash to cover your refinancing fees upfront instead of rolling them into the mortgage will minimize your total borrowing amount. Closing costs usually range between 2% and 5% of the loan amount.
- Choose a standard refinance. While avoiding a cash-out refinance means you can’t tap your home equity, you won’t have to borrow as much. Keeping your new loan balance as low as possible helps keep your LTV ratio low.
- Pursue a cash-in refinance. You can make a lump-sum payment before the closing date to supplement your existing home equity balance. Your lender may also let you apply gift funds from a qualified donor.
Factors that can worsen LTV ratios
Here are some of the situations that can lead to higher LTVs and potentially hinder your ability to refinance.
Declining property values
Even if you’re following your amortization schedule and reducing your mortgage principal, declining home values reduces your available home equity.
If home values in your local market drop too much, your mortgage might go underwater. This means your current home value is less than the loan balance. When you’re underwater on your mortgage, you have a 100% LTV ratio or higher and most likely won’t qualify for financing.
Receiving a poor appraisal
Your lender will require a home appraisal to refinance your home loan. A low appraisal value reduces your cash-out amount and may also impact your rate.
Consider disputing some of the marks you believe are inaccurate and use this opportunity to complete repairs. The appraised value of the home may be higher after a second appraisal.
Having a second mortgage
It can be more difficult to refinance your first mortgage when you have an outstanding balance on a second mortgage, such as a home equity loan or HELOC. You may need to reduce or pay off your second mortgage balance to achieve the desired LTV ratio for refinancing.
Applying for a cash-out refinance
A cash-out refinance lets you borrow money at a potentially lower rate than a personal loan. However, tapping your home equity raises your LTV.
Rolling closing costs into the loan
Your lender may let you add your origination fees, funding fees, or mortgage insurance costs into the loan principal instead of making a lump-sum payment at closing. While you minimize your upfront costs by doing so, you also increase your total loan size.
High LTV mortgage refinances
Consider these homeownership programs when you have a higher LTV ratio and are finding it difficult to qualify for a conventional refinance:
- Fannie Mae RefiNow: To qualify for a RefiNow loan, you’ll need an LTV ratio of 97% or less, a debt-to-income ratio of 65% or less, an income at or below 100% of your area median income, and at least a 620 credit score. Your current mortgage must also be secured by Fannie Mae.
- Freddie Mac Refi Possible: The Refi Possible program allows a maximum LTV ratio of 97% and up to 65% DTI. You also need to have a low or moderate income (up to 100% of your area median income), and a minimum credit score of 620.
- FHA streamline refinance: There’s no maximum LTV ratio on an FHA streamline refinance, however, 90% LTV or lower allows you to waive the annual mortgage insurance premiums after 11 years. Lenders may require a minimum 580 credit score. This option is only available to borrowers with an existing FHA loan.
- VA streamline refinance: A VA interest rate reduction refinance loan (IRRRL), also known as a VA streamline refinance, has a one-time funding fee of 0.5%. However, you don’t have to pay mortgage insurance. This program is only available to existing VA-insured borrowers.
- VA cash-out refinance: A VA cash-out refinance may let you withdraw all of your equity and allows up to 100% LTV. You can also refinance a non-VA loan using this option. However, you’ll pay a higher funding fee — up to 3.6%.
- USDA streamline refinance: Existing USDA direct and guaranteed loan borrowers are eligible for this type of refinance, as long as their new monthly payment is at least $50 lower than their current one. There is no home appraisal or maximum LTV, but the last 12 monthly payments must have been paid on time.
