The mortgage world is full of industry-specific lingo. One commonly used acronym is LTV or Loan to Value. This term is often used in the home buying or refinancing process to describe the loan amount as a percentage of the purchase price or value of the property. For example, an $80,000 loan on a $100,000 property equals an 80% LTV.
You can also think of LTV as the inverse of your down payment. If you put 20% down on a home, your LTV will be 80%. The LTV may be slightly higher if costs, such as upfront mortgage insurance or other funding fees, are added to the loan amount.
Your LTV ratio is important because it will be evaluated during the underwriting of your loan. In general, if you have a lower LTV ratio, you will qualify for a lower mortgage rate than if you have a higher LTV ratio. This is because lower LTV ratios are considered less risky since you would have more equity in your home, therefore you are less likely to default on your mortgage.
Your LTV ratio will also determine whether you have to pay private mortgage insurance, or PMI. For conventional loans, if you want to avoid paying private mortgage insurance, you will need to make a down payment of at least 20 percent of the value of the home.