Loan-to-value (LTV) is a financial ratio that compares the amount of a loan to the value of the asset being purchased with the loan. It is commonly used to evaluate the risk of a loan, as a higher LTV ratio generally indicates a higher level of risk for the lender.
The LTV ratio is calculated by dividing the loan amount by the value of the asset being purchased:
LTV = Loan amount / Value of the asset
For example, if a borrower takes out a loan of $100,000 to purchase a home worth $200,000, the LTV ratio would be 50%.
LTV ratios are commonly used by lenders to assess the risk of a loan and to determine the appropriate interest rate and loan terms. Lenders may have different LTV ratios for different types of loans, and may require a higher down payment for loans with a higher LTV ratio. For example, a lender may require a down payment of 20% for a mortgage with an LTV ratio of 80%, but may only require a down payment of 10% for a mortgage with an LTV ratio of 90%.
LTV ratios are also used by investors and analysts to evaluate the risk of a loan or investment. A higher LTV ratio may indicate a higher level of risk, as the borrower has less equity invested in the asset and may be more likely to default on the loan if the asset loses value.