What is LTV and What Does it Mean?

Everything You Need to Know about LTV

The term LTV is the abbreviation for Loan-to-Value Ratio and is used to describe the value of your home and the money that is currently owed on your home. For example, if you put down $10,000 on a home that costs $100,000, then you are financing 90% of the value of the home. This makes your LTV 90%. On the flip side, this number also tells you the amount of equity in your home. In this example, the equity in this home is $10,000 or 10%.

The reason LTV is important is because it is one of the key risk factors in evaluating your loan approval and interest rate terms. Your LTV is used to aid in evaluating your risk of default. Low LTV ratios, generally considered below 80%, carry with them lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers. Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a satisfactory mortgage history. The higher the LTV, the more risk the lender is taking on.