What is a Loan-to-Value Ratio?

Learn how to calculate your loan-to-value ratio so you know how lenders view your application

When you apply for a home equity loan, you're basically asking to get back in cash what you've already paid on your mortgage. It may seem that if you've paid $10,000 on your mortgage, you could apply for a loan that's worth $10,000. But, the loan-to-value ratio needs to be accounted for first. Learn more about the loan-to-value ratio, how it's calculated and how it impacts the amount of money you can borrow against your house.

Defining the loan-to-value ratio

As the name implies, the loan-to-value ratio indicates how much of a home is still being financed as compared to its value. The higher the ratio, which is represented as a percentage, the more debt you're carrying. The lower the ratio, the less debt you have. Lenders look at the loan-to-value ratio to determine how much more debt you can comfortably afford to take on when you apply for a home equity loan.

How to calculate a loan-to-value ratio

For example, let's say your home is valued at $150,000. To buy it, you put down $10,000 and take out a mortgage for $140,000. To calculate your loan-to-value ratio, you divide the remaining balance on the mortgage by the home's value. At this point, your loan-to-value ratio is 93%. Keep in mind that most lenders will only let you borrow up to 80% of the home's value, although some will lend up to 90%, so that you're not maxing yourself out in terms of debt, which can impede your ability to pay.

As the years go by, you pay your mortgage down and eventually the balance is $100,000. At this point, you decide you want to apply for a home equity loan. It looks like you can apply for a $40,000 home equity loan since that's the portion of the mortgage you've paid. However, the loan-to-value ratio will again be calculated when you apply for the loan. Assuming the value of the house stayed the same, you now have a loan-to-value ratio of 67%.

What this means for your home equity loan

Let's say you could only borrow up to 80% of the home's value and your mortgage balance already puts you at 67%, that leaves you with an additional 13% that is potentially at your disposal, pending approval of your home equity application. So, instead of $40,000, you could take out - at a max - $19,500.

Apply for a home equity loan or line of credit with Citizens Bank

Now that you have a sense of how much of a loan you might qualify for, that can help inform your borrowing decisions. If you're ready to apply you can complete the home equity line of credit application online. Or you can start the home equity loan application process by answering a few questions and a Home Loan Originator will contact you to complete the process. You may also call to speak with a Home Loan Originator if you still have questions about which borrowing option is right for you.


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