What does the Loan-to-Value (LTV) Ratio calculate?

The Loan-to-Value (LTV) Ratio is a crucial metric in real estate financing that assesses the risk associated with a loan. It is calculated by taking the loan amount and dividing it by the appraised value or purchase price of the property, whichever is lower.

This ratio is significant for lenders because it helps them understand how much equity a borrower has in the property and how much of the property's value is financed by the loan. A lower LTV ratio typically indicates less risk, since it implies that the borrower has more equity in the property and is therefore less likely to default on the loan. Conversely, a higher LTV can suggest higher risk for the lender, as it indicates the borrower is financing a larger portion of the property’s value.

Other options, while related to aspects of the loan process, do not pertain to the concept of LTV. Total income, interest rates, and the repayment duration are important in the context of evaluating a borrower’s overall financial situation and loan terms, but they do not specifically calculate the ratio that assesses the relationship between a borrowed amount and property value.