The loan-to-value ratio is very simple. It’s how much you owe on your house to how much it’s worth. Obviously, it’s never a good situation to be underwater on your home, but knowing this ratio can really put your home debt situation in perspective.

First you have to get a good estimate on the market value of your home. If you’ve bought it or refinanced recently, you should have that number handy. If not, look online for a website that gives estimated market values or a listing of recently sold properties in your area to fine comparable properties, such as zillow.com.

Once you settle on your home’s estimated market value, you’ll need your total mortgage principal. Also, if you have a home equity line of credit (HELOC), you’ll need that balance as well.

The loan-to-value ratio is the total mortgage and HELOC debt divided by the market value of the property. For a healthy financial situation, this percentage shouldn’t be more than 50%. Unfortunately, this is not very realistic in the current market. If it is a conventional mortgage, with 80% mortgaged and 20% down, the ratio is already taken well above the recommended maximum (assuming you buy the home at fair market value).

If you have a higher loan-to-value ratio, you may have too much debt, which can lead to issues in the long-run. If it is over 100%, you’re underwater. But there are steps you can take to significantly improve this ratio, especially if you have a significant HELOC balance that is increasing it. Look into including the debt in a debt rollup strategy.

If you plan on staying in your home for a long time, hopefully your property value will increase and your debt load will continue to decrease. It’s also important to know this ratio before deciding to refinance or take a HELOC out.

Next week’s post will be on Tuesday in observance of Labor Day. We hope everyone has a good holiday weekend!

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