How to Figure Loan to Value
Most banks and lenders use some type of loan-to-value (LTV) guidelines when pricing loans. The LTV reflects the amount of a loan relative to the value of the collateral securing it. Conventional mortgages cannot exceed 80 percent of a home's value. Mortgage loans backed by the Federal Housing Administration allow borrowers to have an LTV as high as 97 percent. Some mortgages that are not sold on the secondary market allow people to borrow 100 percent of a home's value. Automobiles are regarded as depreciating collateral in the lending arena, and consequently banks restrict the LTV on older cars to 70 percent or less. People who buy new cars can borrow 100 percent of the car's value on short-term loans that are priced so the balance owed will not deviate significantly from the car's falling value.
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Instructions
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Find out your loan balance. If you are checking the LTV of an existing loan, call the lender and ask for the current principal balance. If you have a recent statement or payment receipt, you can use the principal figure listed as the basis for the loan amount. If you are planning to buy a car or home, estimate how much money you need to borrow and use that as your loan amount.
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Determine the value of the collateral. If you have a car loan, you can use the Blue Book value available online, or through banks and car dealers, to determine the market value of your car. If the collateral is a home, use an online home-value estimator or estimate the value with your own knowledge of the local market. If you're buying a home, use the sale price as the value.
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Divide the loan amount into the value on your calculator. Multiply the answer by 100. The answer shown is your LTV. If you have more than one loan on a home, calculate the LTV using the formula for each loan separately, then add the loan amounts together and divide them into the value to determine the combined loan to value (CLTV).
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Tips & Warnings
County tax appraiser websites show the assessed values of people's homes. The tax values are not necessarily the same as the appraised values of houses on the real estate market, but are a good indicator of the value. Using the tax value, coupled with free electronic home-value estimates available through many websites, homeowners can estimate the current market value of their home. Once you have a value, you can figure out the current LTV. Knowing the LTV enables some people to avoid paying $400 for an appraisal, only to be declined for a refinance mortgage due to lack of equity.
In areas of the nation where houses prices have fallen or are continuing to fall, some banks routinely re-evaluate the LTV of existing home equity lines of credit. If a price fall has caused the LTV to rise above standard underwriting maximums, the banks can reduce or terminate the line of credit.
Most lenders use LTV-based pricing and charge higher interest rates on loans with LTVs above 70 percent. Banks also use line amounts to establish pricing, and larger lines of credit have lower interest rates. Very few people get the best home equity rates, because in most cases, interest savings on large line amounts are offset by rate increases due to high LTV.
