Loan to value ratio or LTV is a measure of assessing the risk that a lender will face in case he lends to a person. If the lender assesses that the borrower has a high loan to value ratio, then the lender will ask for a higher interest rate as compensation.
Loan to value ratio is calculated by dividing the amount of the mortgage by the appraised value of the property. Assume a person who wants to buy a house with an appraised value of $200,000 and pays the bank $40,000 as a down payment and borrows $160,000 as a mortgage. The Loan to Value ratio will be as follows
LTV = Loan Value / Appraised Value = $160,000 / $200,000 = 80%
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