Glossary
From A to Z all the terms you need to skip the jargon and get started!
Loan-to-Value ratio
The Loan-to-Value (LTV) ratio is a financial metric used by lenders to assess the risk associated with a mortgage loan.
It calculates the proportion of the loan amount compared to the appraised value of the property. A higher LTV ratio means that the borrower has less equity in the property, making the loan riskier for the lender. Conversely, a lower LTV ratio indicates that the borrower has more equity, reducing the lender's risk. 🏠💰
For example, if a person wants to buy a house valued at $300,000 and needs a mortgage loan of $240,000, the LTV ratio would be 80% ($240,000 / $300,000).
Fun fact: Lenders often require borrowers with high LTV ratios (usually above 80%) to purchase private mortgage insurance (PMI), which protects the lender in case the borrower defaults on the loan. This added cost can make high LTV loans more expensive for borrowers. 🔝🛡️