The Loan-to-Value (LTV) ratio quantifies the financial risk a lender assumes when financing an asset (such as real estate or an automobile). It compares the principal amount of the loan to the appraised market value of the collateral.
In residential real estate financing: - Low LTV (<= 80%): The borrower has at least 20% equity in the property. This poses low risk to the lender, unlocks the most competitive interest rates, and eliminates the requirement for Private Mortgage Insurance (PMI). - High LTV (> 80%): The lender takes on greater downside default risk. Borrowers are typically required to pay monthly PMI on conventional loans or upfront and annual MIP on FHA loans to protect the lender against potential default losses.
Lenders also calculate Combined Loan-to-Value (CLTV) when a property carries multiple liens (e.g., a primary mortgage plus a Home Equity Line of Credit / HELOC).