How is the LTV ratio calculated?

The loan-to-value (LTV) ratio is an important financial metric used in mortgage lending, as it provides insight into the risk associated with a mortgage loan relative to the property's value. The correct method to calculate the LTV ratio involves dividing the loan amount by the appraised value of the property.

This calculation expresses the loan amount as a percentage of the property's value, reflecting how much of the property's value is financed through debt versus equity. A higher LTV ratio indicates a higher level of risk for lenders, as it suggests that the borrower is financing a larger portion of the property's value, which may lead to difficulties in repayment if property values decline.

Understanding this ratio is critical for both lenders and borrowers; lenders use it to assess risk, while borrowers need to be aware of how their equity in the property may fluctuate over time based on changes in property value and their remaining loan balance. Thus, accurately calculating the LTV ratio helps determine mortgage eligibility, terms, and interest rates.