What impact does a higher loan-to-value (LTV) ratio have on a mortgage?

A higher loan-to-value (LTV) ratio indicates that a borrower is financing a larger portion of the property's value with a mortgage. This situation tends to increase the risk for lenders because it suggests that the borrower has less equity in the property. When a borrower makes a smaller down payment and has a higher LTV, the lender’s potential for loss in the event of default is greater. If the borrower were to default on payments and the property needed to be repossessed and sold, the proceeds from the sale may not cover the remaining mortgage balance, especially if property values decline.

In addition to higher risk, lenders may respond by increasing interest rates or requiring private mortgage insurance (PMI) to mitigate their risk exposure with higher LTVs. Therefore, the impact of a higher LTV ratio fundamentally revolves around increased risk for lenders, which is why this answer is correct. Other options do not accurately capture the implications of LTV ratios; for example, closing costs are not directly affected based on LTV alone, and higher LTV ratios typically do not result in lower interest rates or increased property values.