What is meant by the loan-to-value ratio?

The loan-to-value (LTV) ratio is a financial term that represents the percentage of a property's appraised value that is being financed through a loan. This ratio is pivotal in determining the risk level for lenders; the higher the LTV ratio, the riskier the loan is perceived to be. For example, if a property is appraised at $200,000 and the borrower takes out a mortgage for $160,000, the LTV ratio would be 80%, as $160,000 is 80% of the property's value. Lenders use this ratio to assess how much equity a borrower has in the property and to decide whether to approve a loan, as well as to determine appropriate interest rates.

Understanding the LTV ratio is essential for both borrowers and lenders because it impacts loan approval and terms, and influences the overall financing strategy for real estate transactions.