What does "loan-to-value ratio" (LTV) express?

The loan-to-value ratio (LTV) is a financial term that expresses the relationship between the amount of a loan and the appraised value of the property being purchased or refinanced. This ratio is calculated by dividing the loan amount by the appraised value of the property and is typically expressed as a percentage.

When lenders evaluate this ratio, they use it as a measure of risk. A lower LTV percentage indicates that the borrower has more equity in the property, which generally makes them a less risky proposition for lenders. Conversely, a higher LTV might mean that the borrower has less equity, increasing the lender's risk, and may potentially lead to higher interest rates or the requirement for private mortgage insurance (PMI).

This understanding is crucial for both real estate professionals and potential borrowers, as it can significantly impact mortgage terms, the approval process, and the overall financial strategy when making property purchases.