Real Estate Glossary
Loan-to-Value Formula: How to Calculate It (With Examples)
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Definition
The loan-to-value formula calculates the ratio of a mortgage loan balance to the appraised value of the property securing it, expressed as a percentage. Lenders calculate LTV at origination to determine loan eligibility and terms, and investors track it over time to understand equity position and refinancing opportunities.
The Loan-to-Value Formula Formula
Variables explained:
Loan Amount is the outstanding principal balance of all mortgages (or the requested loan amount for a new loan). Appraised Property Value is the formal appraised value — lenders use the lower of the appraisal or purchase price. For a combined LTV (CLTV) with multiple loans, sum all loan balances before dividing.
Loan-to-Value Formula Example
You own a rental property currently worth $420,000 (appraised). Your remaining mortgage balance is $290,000. LTV = ($290,000 / $420,000) × 100 = 69.0%. You have 31% equity. If a lender allows up to 75% LTV for a cash-out refinance, you could borrow $420,000 × 0.75 = $315,000, pulling out $315,000 − $290,000 = $25,000 in cash while keeping LTV within guidelines.
Why Loan-to-Value Formula Matters for Investors
The LTV formula is your refinancing tool. Calculating your current LTV tells you whether you have enough equity to do a cash-out refinance, access a HELOC, or remove mortgage insurance. Investors systematically track LTV across their portfolio to identify properties ready for a BRRRR refinance or equity extraction for the next deal.
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Frequently Asked Questions
How do I calculate my current LTV?
Get your current mortgage statement for the outstanding balance. Get a current appraisal or use Zillow/Redfin estimate as a proxy. Divide balance by value and multiply by 100. For a refinance, lenders will require a formal appraisal.
What LTV is needed for a cash-out refinance on an investment property?
Most lenders require you to maintain at least 25% equity (75% LTV maximum) after the cash-out refinance on investment properties. Some lenders allow up to 80% LTV with strong credit and reserves.
How does paying down principal change LTV?
Each principal payment reduces your loan balance, which reduces LTV (and increases equity). Early in a 30-year mortgage, principal paydown is slow — most of each payment is interest. LTV falls faster in later years or if you make extra principal payments.
What is the target LTV for DSCR loans?
DSCR loan programs typically allow up to 75–80% LTV for purchase and 70–75% for cash-out refinance. A lower LTV typically unlocks better interest rates and reduces the lender's risk premium.
Related Terms
Loan-to-Value (LTV)
Loan-to-value (LTV) ratio is the percentage of a property's value that is financed by a mo…
Equity in Real Estate
Equity in real estate is the difference between a property's current market value and the …
Amortization
Amortization is the process of paying off a loan through scheduled, fixed payments over ti…
BRRRR Method
BRRRR is an investment strategy acronym standing for Buy, Rehab, Rent, Refinance, Repeat. …