What does the term "loan-to-value (LTV) ratio" refer to?

The term "loan-to-value (LTV) ratio" is a crucial concept in mortgage lending as it indicates the ratio of the mortgage amount to the appraised value of the property. This measurement is significant because it helps lenders assess risk; a higher LTV ratio suggests a greater risk for the lender since the borrower has less equity in the property.

When determining the LTV, the mortgage amount is divided by the property's appraised value, resulting in a percentage that indicates how much of the property is financed versus how much is owned outright by the borrower. Lenders often have guidelines regarding acceptable LTV ratios, as they influence the terms of the loan, including interest rates and the necessity for private mortgage insurance (PMI).

Understanding the LTV ratio is essential for both mortgage agents and borrowers, as it can impact loan eligibility, interest rates, and overall borrowing costs.