What does the loan-to-value ratio (LTV) represent in real estate?

The loan-to-value ratio (LTV) is a key metric in real estate that indicates the proportion of a mortgage loan compared to the appraised value of the property being purchased or refinanced. Specifically, it is expressed as a percentage, calculated by dividing the amount of the mortgage loan by the appraised value of the property.

For example, if a borrower wishes to purchase a home valued at $200,000 and takes out a loan for $160,000, the LTV ratio would be 80% ($160,000 loan / $200,000 property value). This percentage helps lenders assess risk; a higher LTV can indicate higher risk for the lender, as it suggests that the borrower has less equity in the property. Conversely, a lower LTV often reflects a stronger borrower position and potentially better loan terms.

Utilizing LTV effectively allows for a better understanding of risk and financial exposure in real estate transactions, which is crucial for both lenders and borrowers when evaluating mortgage financing options.