Loan-to-value & equity: What do you need to refinance?

Husband and wife sitting in living room, evaluating their home equity to determine options for refinancing

When it comes to the world of mortgages and home buying, you might come across something called the loan-to-value (LTV) ratio.

What is the loan-to-value ratio?

Imagine you’re ready to buy a new home or refinance your current mortgage, and you need a loan to make it happen. The LTV ratio is a nifty metric that calculates the relationship between the loan amount and the appraised value of a property. It’s like a barometer that lenders use to determine which borrowing options you may qualify for.

How does the LTV ratio work?

In the case of buying a new home, the LTV ratio is calculated by dividing the loan amount by either the appraised value or the purchase price of the property, typically whichever one is lower. With a mortgage refinance, you can determine the LTV ratio by dividing your new mortgage amount by the appraised value of your home.

LEARN MORE: Understanding the home appraisal report

Let’s say you’re looking for a mortgage amount of $280,000, and the appraised value of the property is $350,000. You’d simply divide $280,000 by $350,000 to get an LTV ratio of 0.8 or 80%.

You can also use the value of your current equity to estimate your LTV. Simply subtract the equity in your home from its estimated value, then divide that new number by your home’s estimated total value.

If you know that you have $70,000 in equity and your home might appraise for $350,000 today, subtract $70,000 from $350,000 to get $280,000. Then divide that $280,000 by $350,000 for an LTV ratio of 80% again.

These are two different methods to calculate the same ratio.

Mortgage refinance LTV

Now, you might be wondering, “Why does this ratio matter?” The answer is that the LTV ratio is essential in gauging potential loan amounts that you may borrow from a lender. Having a lower LTV ratio typically means you have more options available when working with lenders and may receive additional benefits like lower interest rate offers when taking out a loan.

When you’re thinking about refinancing, try using an online tool like a mortgage refinance calculator. to see how much you may be able to borrow with your current LTV. If you’re unsure of what that number might be, you can browse the internet to find current real estate listings for comparable homes in your neighborhood. This may give you a sense of the current market for home sale prices and help you estimate what your home might be appraised for today.

Mortgage refinance LTV limits

When you refinance, you’re essentially replacing your current mortgage with a new one, and the LTV limits come into play. The specific LTV limit you encounter during a mortgage refinance journey may depend on various factors, including the type of loan you’re seeking, your creditworthiness, and the lender’s own policies.

If your LTV exceeds a lender’s limits, you might face some roadblocks. It could mean you may want to pay down more of your existing mortgage before refinancing, or that you may need to look for alternative refinancing options.

Don’t worry, though — there is a wide selection of lenders out there that offer mortgage refinancing. LTV limits, interest rate offers, term options, and other requirements vary between each one, so make sure to compare and contrast different offers to find what works best for you!

Maximum LTV for a mortgage refinance

Just like with your original mortgage, there isn’t a single maximum LTV limit that applies to everyone in all situations. Typically, the maximum LTV ratio for borrowing will be determined by the limits set by your lender of choice.

You may find a lender that offers up to 80% LTV and another one that offers up to 85% LTV. Discover® Home Loans lets homeowners borrow up to 90% LTV with mortgage refinancing or home equity loans. If you did not originally put 20% of your home’s sale price as a down payment and you recently purchased it, working with lenders that offer higher maximum LTV limits may give you more flexibility with refinancing options.

Cash out refinance LTV ratio

A cash out refinance allows you to refinance your existing mortgage for a higher amount than what you currently owe. The difference between the new loan amount and your existing loan balance is the “cash out” portion, and it comes from the equity in your home you’ve worked to build up.

You might consider a cash out refinance if you are looking to get a new rate or term on your mortgage and you want to unlock funds for things like home improvements, debt consolidation, or other large expenses at the same time. The LTV ratio and limits for a cash out refinance work the exact same as they do for a standard mortgage refinance. But because the new loan amount will be higher than your current mortgage balance, the LTV ratio will be higher too. This may impact the rate and term a lender offers on your refinance.

Choosing a mortgage refinance

The relative benefits of a home refinance depend on your individual circumstances and your existing debt payments. Remember that the loan-to-value ratio is all about finding the balance between your current mortgage amount and the appraised value of your home.

It’s a good idea to have an estimate of your home’s equity and LTV ratio before looking at your options. Combining that information with an understanding of your credit and personal finances may prepare you to seek out multiple lenders and find the options and rates you may qualify for.

NEXT STEPS: Use this application checklist to gather the documents and information you may need to provide to your lender for a mortgage refinance.