How is the loan-to-value (LTV) ratio calculated?

The loan-to-value (LTV) ratio is a crucial metric in the mortgage industry, used to assess the risk of lending. It is calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower. This ratio helps lenders evaluate how much equity the borrower has in the property, thereby influencing decisions on mortgage insurance, interest rates, and loan terms.

In context, a higher LTV ratio indicates a larger amount of the loan relative to the property value, which may suggest a higher risk for lenders. By contrast, a lower LTV ratio indicates a more significant equity stake for the borrower, which is generally viewed as less risky. Using the appraised value or the purchase price in this calculation ensures that the ratio reflects the true market conditions and valuation of the property, providing critical information for lending decisions.