Why is the loan-to-value ratio important?

Why is the loan-to-value ratio important?

For mortgage lenders and borrowers, the loan-to-value ratio is an important factor in determining the repayment terms of a mortgage loan. The LTV ratio is calculated by dividing the total balance of the mortgage taken out by the borrower by the total purchase price or appraisal value of the property being purchased. For example, a transaction with a house with a purchase price of $ 200,000, a down payment of $ 10,000 and a total mortgage debt of $ 190,000 results in an LTV ratio of 95%.

Lenders see a lower LTV ratio as a better long-term risk, which corresponds to a higher participation in equity in the household. An LTV ratio that is higher than 80% is considered a higher risk transaction and borrowers often pay more during the term of the mortgage loan when the ratio is within this range. This calculation is used for new purchases and to refinance mortgage transactions. Read more