High vs. Low LTV: Which is Better for Your Real Estate Strategy?

Nearly 80 percent of lenders label loans above 80 percent loan to value ratio as higher risk, often adding private mortgage insurance and half-point rate hikes. When you weigh a high versus low financing ratio, your upfront cash, monthly payments, and long-term returns shift in opposite directions.

Key idea
There’s no single best LTV level: your goals, cash reserves, and risk tolerance decide whether a higher or lower financing ratio fits your real estate strategy.

Understanding loan to value and DSCR

Getting clear on metrics like loan to value and debt service coverage ratio (DSCR) helps you choose smarter financing.

Defining loan to value ratio

Your loan to value ratio (LTV) compares how much you owe against a property’s value. A 90 percent LTV means you borrow \$180,000 on a \$200,000 purchase, putting down \$20,000. Higher LTVs lower your cash needs, though they raise monthly costs and lender risk.

Why mortgage insurance matters

Lenders usually require private mortgage insurance (PMI) when your financing ratio tops 80 percent. PMI can tack on 0.3–1.0 percent of the loan amount to your annual payments. Keeping your ratio under that threshold often cancels PMI, trimming thousands off lifetime costs.

Seeing debt coverage with DSCR

The DSCR gauges whether rental income covers debt service. A ratio of 1.0 means net operating income equals mortgage payments. Anything above 1.0 gives you a cash-flow cushion. Lenders lean on DSCR alongside your financing ratio to confirm you can meet monthly obligations.

Benefits and risks of a higher LTV

High LTVs unlock more purchasing power but come with trade-offs. Lay out both sides before you decide.

• Benefits
• Lower upfront cash—ideal if you’re cash-strapped or targeting multiple deals.
• Faster portfolio growth—you can acquire more properties with the same reserves.
• Better market entry—90 percent financing can let you jump on deals in hot markets.
• Risks
• Higher interest rates—loans in the 80–90 percent range often cost 0.5 percent more in rates than below 80 percent.
• PMI obligations—expect 0.3–1.0 percent extra cost until you hit 20 percent equity.
• Greater balance owed—more debt means less initial equity and higher leverage risk.

Example small-portfolio investor
You find a \$150,000 duplex and want minimal cash outlay. With 90 percent financing, you invest \$15,000 down. Your monthly mortgage jumps, and PMI adds roughly \$40 per month, yet you keep \$135,000 in reserves for renovations or new deals. If rental income covers payments, this strategy can accelerate growth—just watch your cash flow closely.

Benefits and risks of a lower LTV

Choosing a lower financing ratio often costs more upfront but brings stability and savings over time.

• Benefits
• Reduced interest rates—loans under 80 percent LTV usually secure the best pricing.
• No PMI—once your ratio stays below 80 percent, you sidestep extra insurance costs.
• Equity cushion—a larger owner stake lowers lender risk and smooths refinancing.
• Risks
• Higher down payment—you’ll need more cash to hit the target ratio.
• Slower scaling—reserves tied up in one deal aren’t available for other investments.
• Opportunity cost—money in equity can’t chase higher-return projects elsewhere.

Renovation tactics to lower LTV

Boosting a property’s value can trim your financing ratio without extra savings. Consider these projects:

• Add a bedroom (cost ~\$140 per square foot) to gain roughly \$50,000 in appraised value.
• Install an extra bathroom (yields up to 8.4 percent value increase).
• Finish a basement (can raise worth by about 6.6 percent, per industry reports).
• Refinance after market gains or principal pay-down to lock in a lower ratio and cut PMI.

Choosing the right LTV for you

Match your financing ratio to your strategy by asking a few key questions:

• What are your cash reserves? Smaller reserves point toward a higher ratio.
• How long is your hold period? Long-term investors can weather PMI and rate premiums.
• What’s your risk tolerance? If stability matters more than rapid scaling, a lower ratio shines.
• Do you plan renovations? Quick value-adds can shift you into a safer LTV band later.

Using BRRRR to balance ratios

The BRRRR method—Buy, Rehab, Rent, Refinance, Repeat—lets you start with a high LTV, then lower it. Steps include:

1. Buy with minimal down payment to preserve cash.
2. Rehab strategically to boost appraised value.
3. Rent and stabilize income streams.
4. Refinance based on the new value to lower your financing ratio.
5. Repeat the cycle with freed-up capital.

This approach blends growth and prudence, letting you scale while gradually improving loan terms.

Quick recap and next steps

• High LTV cuts your cash barrier but raises rates and PMI costs.
• Low LTV trims monthly expenses and insurance, though it ties up more equity.
• Renovations and refinancing can shift a high ratio down over time.
• Align your financing ratio with cash reserves, hold horizon, and risk appetite.

Next, review your budget and goals and pick a target range for your financing ratio. Talk to a lender about rate breaks around the 80 percent threshold. Finally, plan any renovations that could boost your value and unlock better terms. Good news—by dialing in the right ratio, you’re on track to smoother financing and stronger returns.