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When you’re applying for a mortgage, the numbers matter. So it’s important to understand what everything means, which isn’t always easy when you’re trying to decipher industry jargon and acronyms.

One of these terms is “loan-to-value ratio”, which is often simply referred to as LTV. When applying for a home loan, the LTV can make a big difference in what type of mortgage you’re eligible for, your loan’s interest rate and the fees you pay.

Below, CNBC Select covers how loan-to-value ratios work and why it’s such an important number to understand.

A loan-to-value ratio (LTV) is a number that shows how much money is being borrowed in comparison to the value of the collateral. LTV has significant implications for mortgage applications and is expressed as a percentage. For example, if you’re purchasing a home worth $100,000 and your mortgage loan balance is $80,000, you have an 80% LTV.

The LTV requirement for a mortgage depends on the type of loan and your financial situation. If you’re struggling to find a home loan that fits your needs, try a lender that offers a larger variety of loan types. PNC Bank is CNBC Select’s best mortgage lender for flexible loan options and offers conventional loans, USDA loans, VA loans, FHA loans and more.

Calculating LTV is straightforward because you’ll typically only have to know two numbers: The loan amount and the appraised property value.

The formula is this:

Current loan balance / current property value = LTV

You can change your initial LTV by increasing your down payment or negotiating a lower purchase price. Over time, your LTV will drop as you pay off the loan and the property (hopefully) increases in value.

LTV vs. CLTV

Whenever you’re taking out a second loan on a property the lender will look at a combined-loan-to-value ratio (CLTV). The CLTV uses a similar formula as LTV but factors in the balances of multiple loans.

A common situation where CLTV matters is when you’re getting a home equity loan or a home equity line of credit (HELOC). For these types of loans, you’re typically allowed to have a CLTV of up to 80%.

If you’re looking to cash out some of your home’s equity to pay for a renovation, calculating your CLTV helps you figure out your rehab budget. Let’s say your home is worth $350,000, you’ll usually be able to borrow up to an 80% CLTV, which would be $280,000 in total. This means if your current mortgage balance is $200,000, you could finance $80,000 in home upgrades.

When it comes to mortgages, LTV affects what type of loans you’re eligible for and your borrowing costs.

The LTV requirements for a mortgage vary depending on the loan type. Mortgages with smaller down payment requirements, for example, allow for higher LTVs. An FHA loan allows down payments of as little as 3.5% or an LTV of 96.5%. And USDA or VA loans can have an LTV of 100% (essentially requiring no down payment).

Conventional loans usually have stricter LTV guidelines, although certain conventional loan programs allow for an LTV as high as 97%. Just remember that with conventional loans, you’ll be required to pay private mortgage insurance (PMI) if your LTV is 80% or higher.

Aside from helping you qualify for a mortgage, a lower LTV can get you a better interest rate, although other factors such as your credit score, the type of loan and the loan balance also play a role.

The average rate for a 30-year mortgage dropped to 6.15% last week — the lowest in 18 weeks.

This dip in rates provides welcomed relief for many potential homebuyers who’ve put their dreams on pause thanks to high mortgage interest rates, which have drastically reduced their buying power. 

On top of reduced interest rates, the Federal Housing Finance Agency (FHFA) has announced changes to its fee structure beginning May 1, 2023. These changes affect conventional loans and will reduce the cost of a loan for certain borrowers (while increasing it for others).

Plus, according to Redfin, average home prices in the U.S. have continuously dropped, albeit slowly, since hitting their peak in May 2022.

With rates lower than they have been and fee changes coming down the pipeline, it’s a good time to reassess the home-buying plans you may have put on hold and decide if now is the time to act.

If a painfully-high interest rate was the only thing holding you back from signing a mortgage, then you may want to jump on today’s (relatively) low rates. The Federal Reserve has been steadily increasing its benchmark Federal Funds rate and has signaled its intent to continue this pattern until inflation is under control. As long as the Federal Funds rate stays high, so will mortgage rates.

The recent dip in rates represents a significant savings for home buyers. Today’s 30-year mortgage rates are currently 0.93% lower than they were last fall, when rates hit 7.08%. For a $500,000 home loan, a 0.93% lower rate saves you $300+ on your monthly payment and over $110,000 in interest over the life of the loan.

To get the lowest interest rate on your mortgage, however, you’ll want to make sure your credit score is as high as possible. This may be the most-important step you can take when trying to get the best terms on a mortgage.

But before committing to buying a home, you’ll need to save up money for a down payment and closing costs. These upfront costs can easily add up to 10%- 20% of the home’s purchase price. On top of that, it’s a good idea to have money set aside for maintenance, repairs and moving costs. You’ll need to make sure you have enough money saved up before starting your home search.

One way you can reduce some of the upfront costs of buying a home is to compare offers from lenders that don’t charge origination fees. Here are some of the best lenders with no origination fees according to our rankings:

The upcoming FHFA fee changes affect conforming conventional loans, which can be sold to Fannie Mae or Freddie Mac by lenders. More niche mortgages, such as jumbo loans, FHA loans and VA loans will not be affected by these changes.

The specific fees that are changing are known as Loan Level Price Adjustments (LLPAs), which are risk-based fees applied to loans. Lenders base these fees on factors such as the borrower’s credit score, the loan-to-value ratio (LTV) and the type of mortgage. In general, you’ll pay more if your credit score is lower or if you’re borrowing a higher percentage of the property’s value (i.e. higher LTV).

The future fee changes will add an additional layer of complexity to a process that already causes heads to spin. For example, the LLPAs for a purchase mortgage will drop for some borrowers with lower credit scores, while borrowers with higher credit scores could be paying more in certain circumstances.

Given the amount of nuance with LLPAs, it’s important to have a conversation with your lender (or multiple lenders) to see how the upcoming changes could affect your home loan. Keep in mind that although the changes apply to loans sold to Fannie Mae or Freddie Mac from May 1, 2023, lenders will begin adjusting their fees well before that deadline.

You can see the current fees here and the upcoming fee structures here.

Mortgage rates have dipped in recent weeks, which can help make your future mortgage payments more affordable. Just be sure to pay attention to the fees, in addition to the rate, when you are comparing mortgage loan offers.

Also, certain fees associated with conventional loans are changing soon, which could save you money or cost you more depending on your situation. So if you’re in the process of buying a home, talk with your lender to figure out how you’ll be affected.

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