A loan-to-value (LTV) ratio measures the loan amount against the value of the asset being purchased with the loan. To calculate LTV the loan balance is divided by the value of the asset as a percentage. Lenders use LTVs to determine how large of a loan you require relative to what the asset that you need to finance is worth. It’s a measure of risk, as higher LTVs are considered riskier than lower ones. That’s because a higher LTV ratio means that a larger portion of the asset in question is being financed with the loan. LTV is a crucial measurement in mortgage financing. The LTV determines whether you’ll require mortgage default insurance (see High Ratio Insurance) of if there’s enough equity for a 2nd mortgage.
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