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How Does Loan-to-Value Ratio Impact Home Equity Loans or HELOC Rates?

A low loan-to-value ratio (LTV) means you’ve built equity in your home, and often is an indication that you have a good chance of qualifying for the best home equity loan or home equity line of credit (HELOC) rates.

An LTV ratio compares what you owe on your home versus its current market value, so a lower ratio means you possess more equity. Generally speaking, if you have a low LTV ratio you’re more likely to qualify for the best home equity product rates.

How do I find my LTV ratio?

To figure your LTV ratio, a bank compares what you owe on your home with the current appraised property value. It’s one of the key factors lenders consider when you apply for a home equity loan or a HELOC.

To find your LTV ratio, divide what you owe on your home by your property’s current appraised value. For example, if you owe $150,000 on your home and the bank appraised it for $250,000, your LTV ratio equals 0.6. Multiplying by 100 gives you an LTV of 60%.

If you have a second mortgage, find your combined LTV ratio by adding together all liens against the property then dividing that number by the property’s current appraised value. A lending institution will likely send an appraiser to evaluate your property in person before approving home equity financing, unless the bank and appraiser decide they can waive the appraisal requirement and use nearby comparable properties to accurately value your property.

A lower LTV ratio gives you a better chance of receiving the best home equity product rate. You typically need an LTV ratio under 90% to qualify for any type of home equity loan — although you’ll receive the best rate if it’s 80% or lower.

How can I improve my loan-to-value-ratio?

You can take several steps to decrease your LTV ratio and potentially qualify for a better interest rate or larger loan. These strategies can boost your home equity or reduce the amount you owe on your mortgage.

Improve your LTV ratio by:

  • Making regular mortgage payments
  • Paying extra toward your home loan’s principal
  • Increasing home equity by refinancing
  • Increasing your home’s value through improvements with a positive ROI (return on investment)

When you apply for a home equity loan or HELOC, other factors lenders take into consideration include your credit score, employment history and debt-to-income ratio.

Explore the many options your home’s equity has with our financial calculators.

Want to learn more about home equity rates? Speak with a First Merchants Bank lending expert today by calling 1.800.205.3464 or visiting a local branch. We invite customers to start the application process online.