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LTV, DTI, IR, FICO: Four Pillars of Home Financial Wellness

Financial literacy not only involves the ability to count your money, it also tests your ability to evaluate the cost and benefit associated with each decision you make. -Wayne Chirisa

Couple of homeowners asking an accountant about their LTV, DTI, IR, and FICO credit score
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Summary

Four Pillars of Home Financial Wellness

  1. Loan-to-value ratio (LTV) – How much equity you own relative to how much mortgage you still owe
  2. Debt-to-income ratio (DTI) – How much of your income is allocated to paying your current debts
  3. Mortgage interest rates (IR) – The added cost you need to pay
  4. FICO credit score – The creditworthiness of an individual

Homeowners often ask, what else is important for my home financial wellness? This may come up when accessing home equity, planning for retirement, understanding the right time to refinance, or considering a move or a new job.

Loan-to-value ratio (LTV)

LTV is measure of home much equity you have in your home relative to the debt you still owe on your mortgage(s), which includes any home equity loans and home equity lines of credit (HELOCs) you have. It’s calculated as: (total of all mortgage debt) ÷ (home value).

  • What is good: A lower LTV is better, because it means the debt on your home is smaller compared to its value. So, you are less risky in any financial transaction.
  • Why it matters: A lower LTV usually means that you will get a lower interest rate on a mortgage refinance, home equity loan, or HELOC, and even on your next home purchase if you use that equity to make a larger down payment. If you’re 55 or older, you’ll also be able to qualify for and access more money to help fund your retirement if you’re interested in a reverse mortgage.

Debt-to-income ratio (DTI)

DTI measures how much of your income each month is needed to cover your debts. To make it confusing, there are two types of DTI: front-end and back-end. Back-end DTI is more widely used, because it takes into account all your debts. It’s calculated by first adding up all of your recurring, monthly debts: mortgage payment, property taxes, home insurance, HOA dues, car payment, student loan, minimum credit card payments, etc. You then divide that by your total, gross monthly income (do not take out taxes or other deductions).

  • What is good: A good target for a back-end DTI is below 26%, but you can qualify for a mortgage with a higher DTI than this depending on the lender and mortgage type.
  • Why it matters: A lower DTI ratio will help you get a better mortgage interest rate as well as help improve your credit score. More importantly, it’ll also reduce stress and create an opportunity to build wealth, because you’ll have more income available for spending and saving.

Mortgage interest rates (IR)

It determines what you’ll pay to borrow money from a lender, expressed as a percentage. Don’t be embarrassed if you don’t know yours — 38% of homeowners don’t.

  • What is good: This depends! Lower is of course better, because you’ll pay less interest over the life of your loan. But, what’s a good rate right now depends on many factors. Most recently, in early 2021, the 30-year fixed rate mortgage bottomed out at 2.65%. In your House Numbers, we show you how your current rate compares to the market at any given time.
  • Why it matters: A lower interest rate will likely save you thousands of dollars (or more!) over the life of your mortgage. Even a 0.25% IR decrease on a $500k, 30-year fixed rate mortgage would save you $324/mo and over $115k over the life of the loan.

FICO credit score

I’ll keep this short, because most people know about their credit score! 🙂 If not, here’s what the Consumer Financial Protection Bureau has to say. There are several types of scores, but FICO is most commonly used in the mortgage industry.

  • What is good: Lenders set their own standards, but these are general guidelines: (1) 740+ is generally considered excellent; (2) 700 — 739 is considered good; (3) 630 — 699 is fair; and (4) 629 and below is poor credit.
  • Why it matters: A higher credit score will help you get a better mortgage interest rate. As one example, a 100-point increase in your credit score for a $240k mortgage could lower your rate 0.5% and save you more than $25,000 over 30 years. You’ll also save on interest on your credit cards, auto loans, and other types of debt.

I recommend you check out your House Numbers today!

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.

Jeff Levinsohn

Written By Jeff Levinsohn

Jeff is the CEO of House Numbers and a home wealth management geek. He’s obsessed with tools and information that empower homeowners to save money, access their home equity, and build long-term wealth.