Refinancing when your Loan-to-Value (LTV) ratio improves, particularly below 80%, makes financial sense. how Refinancing can improve your LTV by demonstrating greater equity, leading to benefits like lower interest rates, elimination of Private Mortgage Insurance (PMI), and access to cash-out options. This strategic move helps reduce monthly payments and saves significant money over the loan’s life, especially when savings outweigh closing costs.
What is Loan-to-Value (LTV) Ratio?
The Loan-to-Value (LTV) ratio measures the relationship between your current mortgage balance and the appraised value of your property. It is one of the most important metrics used by lenders when evaluating risk for both new loans and refinances.
Formula:
LTV = (Loan Amount ÷ Appraised Value) × 100
Example:
- Loan Balance: $240,000
- Appraised Home Value: $300,000
- LTV = (240,000 ÷ 300,000) × 100 = 80%
This means that 80% of the property’s value is financed, while you own the remaining 20% in equity.
Why a Lower LTV Ratio Matters
The lower your LTV ratio, the more equity you hold—and the less risky you appear to lenders. A better LTV generally unlocks:
- Lower Interest Rates
- No Private Mortgage Insurance (PMI)
- Access to More Refinancing Options
- Eligibility for Cash-Out Refinance
- Improved Approval Chances
What is a “Good” LTV for Refinancing?
LTV Range |
Risk Level |
What It Means for You |
| > 90% | High | May be denied or face high interest and PMI |
| 80–90% | Moderate | Limited options; may still require PMI |
| < 80% | Low (Ideal) | No PMI; eligible for better rates |
| ≤ 60% | Very Low (Excellent) | Best rates and flexibility; strong equity position |
Most lenders require an LTV of 80% or less to remove PMI and offer the best refinancing options.
When Does Refinancing with a Better LTV Make Financial Sense?
Refinancing isn’t free. It comes with closing costs, time commitments, and paperwork. However, refinancing does make sense when your improved LTV leads to meaningful financial benefits. Here’s when it works in your favor:
1. You Can Eliminate PMI
If your current mortgage requires PMI because your LTV was above 80%, refinancing once your LTV falls below 80% allows you to eliminate PMI.
Savings Tip: PMI can cost anywhere between $100–$300/month, so eliminating it can save up to $3,600 annually.
2. You Qualify for a Lower Interest Rate
Improved LTV makes you more attractive to lenders. If interest rates are lower than when you first got your mortgage, and your LTV has improved, you could lock in a better rate.
Case Example:
Criteria |
Before Refinance |
After Refinance |
| Home Value | $300,000 | $300,000 |
| Loan Balance | $270,000 (90%) | $240,000 (80%) |
| Interest Rate | 6.5% | 5.0% |
| PMI | $200/month | Removed |
| Monthly Payment (Est.) | $2,000 | $1,750 |
Total Monthly Savings: $250
Annual Savings: $3,000
3. You Want to Access Home Equity (Cash-Out Refinance)
If your LTV is significantly lower (e.g., 60–70%), a cash-out refinancing might be feasible. You borrow more than your existing loan, pocket the difference, and use it for:
- Home renovations
- College tuition
- High-interest debt consolidation
- Investments
Lenders typically require that your new LTV after the cash-out remains below 80%.
But What About Costs?
Refinancing isn’t free. You’ll face closing costs ranging from 2% to 5% of the loan amount. Make sure the savings outweigh the costs.
Break-Even Calculation
Break-Even Point = Closing Costs ÷ Monthly Savings
Example:
- Closing costs = $4,000
- Monthly savings = $200
- Break-even point = 20 months
If you plan to stay in your home longer than 20 months, refinancing makes sense.
When Refinancing May NOT Be Worth It
Even with a better LTV, refinancing isn’t always the right choice. Here are some red flags:
- You plan to move or sell the home within the next 1–2 years.
- Your closing costs are too high to justify savings.
- Interest rates are higher now than your current rate.
- You’re well into your mortgage term—refinancing might reset the clock and increase long-term interest payments.
- You have a low credit score despite a good LTV, which may still result in high rates.
Types of Refinancing That Benefit from Better LTV
1. Rate-and-Term Refinance
Changes your interest rate or loan term. Most common when homeowners seek lower payments or faster payoff.
2. Cash-Out Refinance
Tap into your home equity. Requires solid credit and typically an LTV under 80%.
3. FHA Streamline Refinance
For those with FHA loans. Often doesn’t require a full appraisal but still benefits from a better LTV.
4. VA IRRRL (Interest Rate Reduction Refinance Loan)
For veterans with VA loans. Streamlined process but improved LTV can still lead to better rates.
Steps to Take Before You Refinance
- Get a Home Appraisal
Your home may have appreciated more than you think. - Check Your Credit Score
Combine good LTV with high credit for the best offers. - Compare Lenders
Don’t settle—shop for the best rates and fees. - Calculate Closing Costs
Understand the full cost and how long it’ll take to break even. - Use Online Refinance Calculators
Tools help visualize savings and timelines.
Conclusion
Yes—if the numbers work out.
A lower LTV opens the door to better rates, no PMI, and equity access. But refinancing is not just about ratios. You must consider your current interest rate, how long you plan to stay in the home, and how much closing costs will impact your financial outcome.
In short, refinancing with a better LTV makes financial sense when:
- You’ve hit at least 20% equity (LTV ≤ 80%)
- Interest rates are lower than your current loan
- You can eliminate PMI
- You plan to stay in the home long enough to break even