Loan-to-value — LTV — is one of the first numbers a lender calculates on any mortgage. It compares the size of the loan to the value of the property securing it, and it influences how much can be borrowed, the interest rate offered, whether mortgage insurance applies, and how much cash a refinance can return.
The formula
The “value” is usually the lower of the purchase price or the appraised value for a purchase, and the appraised value for a refinance.
The flip side of LTV is the owner’s equity share: a 75% LTV means the owner holds 25% equity.
A $400,000 purchase with a $300,000 loan
| Item | Amount |
|---|---|
| Purchase price | $400,000 |
| Loan amount | $300,000 |
| Down payment (equity) | $100,000 |
| LTV | 75% |
Hypothetical numbers for illustration.
Why LTV matters to lenders
LTV is a measure of the lender’s cushion. If a borrower stops paying and the property has to be sold, a lower LTV means there’s more value above the loan balance to absorb selling costs or a drop in price.
Because of that, LTV often affects:
- Maximum loan size. Lenders set LTV caps by loan type and property type. Investment properties often have lower maximum LTVs than owner-occupied ones.
- Interest rate and fees. Higher LTVs can come with higher rates or pricing adjustments.
- Mortgage insurance. On some loan types, LTVs above a certain threshold require mortgage insurance.
LTV and the down payment
For a purchase, the maximum LTV directly sets the minimum down payment:
| Maximum LTV | Maximum loan | Minimum down payment |
|---|---|---|
| 75% | $300,000 | $100,000 |
| 80% | $320,000 | $80,000 |
Closing costs come on top of the down payment, so the total cash needed is higher than the equity figure alone. (They’re part of the total cash invested in a cash-on-cash return calculation.)
LTV in a refinance
In a refinance, LTV is based on the current appraised value and determines how large the new loan can be. That’s the heart of a cash-out refinance — and of the refinance step in the BRRRR method.
Refinancing after five years
The property from the first example is now appraised at $460,000. After five years of payments at 6.5%, the loan balance is about $280,833.
| Item | Amount |
|---|---|
| Current value | $460,000 |
| Current loan balance | $280,833 |
| Current LTV | 61.1% |
| Maximum new loan at 75% LTV | $345,000 |
| Cash available before closing costs | $64,167 |
Hypothetical numbers for illustration.
The new loan would be larger than the old one, which means a higher payment and lower monthly cash flow — the trade-off for taking cash out.
How LTV changes over time
Two forces lower LTV after purchase: principal paydown shrinks the loan, and appreciation (if it happens) raises the value. Falling values do the opposite.
| Year | Value (3%/yr growth) | Loan balance | LTV |
|---|---|---|---|
| 0 | $400,000 | $300,000 | 75.0% |
| 5 | $463,710 | $280,833 | 60.6% |
| 10 | $537,567 | $254,328 | 47.3% |
| 15 | $623,187 | $217,677 | 34.9% |
The appreciation assumption is doing a lot of work in this table. With flat or falling values, LTV would decline much more slowly — only as fast as the loan is paid down.
Combined LTV (CLTV)
When there’s more than one loan on a property — say, a first mortgage plus a second mortgage or a home equity line — lenders look at combined LTV:
Adding a $40,000 second loan to the original $300,000 mortgage on the $400,000 property gives a CLTV of 85%.
LTV vs. loan-to-cost
On renovation projects, lenders often use loan-to-cost (LTC) as well: the loan amount divided by the total project cost (purchase plus rehab). A lender might lend up to a certain percentage of cost and also cap the loan at a percentage of after-repair value. Both limits apply, and the lower one sets the loan size.
Why LTV matters for analysis
LTV ties together several numbers covered elsewhere:
- A higher LTV means a larger loan, a higher payment and lower DSCR.
- It means less cash invested, which can raise or lower cash-on-cash return depending on the loan’s cost.
- It means a thinner equity cushion if values fall.
Running a property at a few different LTVs shows how each of those moves together.
Frequently asked questions
Is LTV based on the purchase price or the appraisal? For purchases, lenders commonly use the lower of the two. If a property appraises below the contract price, the loan is sized to the appraisal, and the buyer covers the difference in cash.
Does a lower LTV always mean a better rate? Lower LTVs often qualify for better pricing because the lender’s risk is lower, but rates also depend on credit, property type, loan program and market conditions.
What happens to LTV if values fall? LTV rises even though the loan balance hasn’t changed. That can limit refinancing options until the loan is paid down further or values recover.
Is LTV the same as equity? They’re complements. LTV is the share of value that’s borrowed; equity is the share that isn’t. A 70% LTV corresponds to 30% equity.
The takeaway
LTV is the loan amount divided by the property’s value. It sets maximum loan sizes and down payments, influences pricing and mortgage insurance, determines how much a refinance can return, and changes over time as the loan is paid down and values move. It’s a simple ratio that connects financing, equity and risk in one number.