Home Loan Guidance Topics

For the Best Interest Rates and Avoid PMI,
Try to Stay Under 80% LTV, or Even Below 75% LTV


Remember, LTV? We've touched on this already, but it's worth diving into further. LTV stands for "Loan-To-Value" which is a ratio calculated by taking the loan amount and dividing by the appraised value of the home. So, a loan of a $170,000 secured by a home valued at $200,000 is a loan with an 85% LTV. A loan of $75,000 on a home valued at $100,000 would be a 75% LTV, and so on. (The sales price of the home may be used instead of the appraised value if the sales price is lower.)

An important distinction is that LTV is calculated against the appraised value of the home, not necessarily the same as the value you are paying for it. So, if for some reason you are buying a home on speculation that it will be going up a lot in value, it's possible an appraiser may not see the market the same way. If the appraiser values the home less than your purchase price, the LTV ratios will use that appraised value, not the price you believe is right.

Interest rates seem to be better whenever the loan is 75% or less than the appraised value of the home. Lenders charge more when they suspect there is more risk. An LTV of 75% means that if you, the borrower, are unable to pay back the loan, the value of the home could fall by as much as 25% and the lender would still be able to sell your home and get back all of the amount the lender had loaned to you.

Even if you cannot afford a down payment of 25%, keeping your loan at 80% LTV or better will still get you some of the best interest rates available. However, as your loan moves above an LTV of 80%, lenders believe that the loan gets riskier and so interest rates begin to move higher, but there is something even more problematic and costly for the borrower. Loans with an LTV above 80% usually require that you pay Private Mortgage Insurance (PMI).

80% LTV is the cutoff for the loan being characterized as slightly risky. And so, the lenders will generally require that you pay Private Mortgage Insurance, or PMI. PMI insures the lender for the loan should you be unable to pay it back, and should your home's value not be enough to pay off the value of the loan either. Mortgage insurance can be as much as 1/2% or more above the interest rate. Further, PMI is not tax-deductible on your tax return like interest expense can be.

To avoid PMI and to get the best interest rates, keep your LTV at 80% or below.

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