Loan-to-Value (LTV) Ratio
Loan-to-Value (LTV) Ratio is a financial term that measures the ratio of a loan amount to the appraised value of the property bEINg purchased. It is expressed as a percentage and is commonly used by lenders to assess risk when approving mortgage loans.
LTV is calculated using the formula:
LTV Ratio = (Loan Amount / Appraised Property Value) x 100
Examples:
- If a borrower wants to purchase a home valued at $200,000 and takes out a mortgage of $150,000, the LTV ratio would be:
- LTV = ($150,000 / $200,000) x 100 = 75%
- In another case, if the same borrower had a mortgage of $180,000 on the same $200,000 home, the LTV ratio would be:
- LTV = ($180,000 / $200,000) x 100 = 90%
Cases:
- A lower LTV ratio (e.g., 80% or below) typically indicates less risk for lenders and may result in better loan terms.
- A higher LTV ratio (e.g., above 80%) can indicate higher risk, often requiring private mortgage insurance (PMI) to protect the lender.