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Loan-to-Value (LTV) Ratio

The loan-to-value (LTV) ratio is a financial metric that compares the amount of a loan to the appraised value of the asset being purchased, typically used in real estate transactions. It is calculated by dividing the loan amount by the property’s appraised value. A higher LTV ratio indicates that a larger portion of the property is being financed through debt, which can increase risk for both the lender and borrower. Lenders often require mortgage insurance for loans with high LTV ratios to mitigate risk.

Example

A homebuyer obtains a $180,000 mortgage to purchase a house appraised at $200,000, resulting in an LTV ratio of 90% ($180,000 ÷ $200,000).

Key points

• A financial metric that compares the loan amount to the appraised value of the asset being financed.

• Used to assess the risk of loans, particularly in real estate transactions.

• A higher LTV ratio indicates more debt financing and potentially greater risk.

Quick Answers to Curious Questions

It measures the amount of a loan relative to the appraised value of the asset, typically used in real estate financing.

A high LTV ratio means the borrower is financing a larger portion of the asset with debt, increasing the risk of default and potential losses for the lender.

Lenders often require mortgage insurance or charge higher interest rates for loans with high LTV ratios to offset the increased risk.