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

How does the LTV ratio work?

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

LEARN MORE: Understanding the home appraisal report

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

Mortgage refinance LTV

When you refinance, you’re essentially replacing your current mortgage with a new one. LTV ratio is one factor lenders typically use to assess the risk of approving the new loan.

Your LTV ratio may influence the loan amount you may be able to borrow. Generally, the lower your LTV ratio, the more favorable loan terms you may get. 

If 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.

Mortgage refinance LTV limits

Typically, a lender sets an LTV limit to determine the maximum loan amount you may be eligible for when refinancing. For example, a lender may have an LTV limit of 80%. This means they will only lend up to 80% of the appraised value or purchase price of your home. 

Maximum LTV for a mortgage refinance