Define: Loan-To-Value Ratio

The loan-to-value ratio (LTV) is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased with the loan.

The loan-to-value ratio is calculated by dividing the loan amount by the appraised value of the asset. For example, if you are taking out a $200,000 loan to purchase a home appraised at $250,000, the LTV ratio would be 80%.

Lenders use the LTV ratio to assess the risk of a loan. A higher LTV ratio indicates a higher risk for the lender, as the borrower has less equity in the asset.

A lower LTV ratio is generally considered more favorable, as it indicates that the borrower has more equity in the asset. Lenders often prefer LTV ratios of 80% or lower.

It is possible to get a loan with a high LTV ratio, but it may come with higher interest rates or require additional mortgage insurance to mitigate the lender’s risk.

If the LTV ratio is higher than 80%, lenders may require the borrower to pay for private mortgage insurance (PMI) to protect the lender in case of default.

You can lower your LTV ratio by making a larger down payment, paying down the principal balance of the loan, or increasing the value of the asset through improvements or appreciation.

If the LTV ratio exceeds 100%, it means the loan amount is greater than the value of the asset. This is often referred to as being “underwater” or “upside down” on the loan.

A lower LTV ratio can make it easier to qualify for refinancing at a lower interest rate, while a higher LTV ratio may result in higher interest rates or difficulty in obtaining refinancing.

Yes, the LTV ratio can change as the value of the asset fluctuates or as the borrower pays down the loan balance. Refinancing or taking out a home equity loan can also affect the LTV ratio.