How is the Loan-to-Value (LTV) ratio calculated?

The Loan-to-Value (LTV) ratio is a financial term used to express the ratio of a loan to the value of an asset purchased. It is a crucial measure in real estate finance that helps lenders assess the risk associated with a loan. To calculate the LTV ratio, you take the amount of the loan and divide it by the appraised value of the property or asset securing the loan.

This formula, which is represented by the answer you selected, indicates how much of the property's value is being financed by debt. For example, if a property is valued at $200,000 and a buyer is seeking a loan of $150,000, the LTV ratio would be calculated as $150,000 divided by $200,000, which equals 0.75 or 75%. This means that 75% of the property’s value is financed through the loan.

A high LTV ratio is often seen as a greater risk to lenders since it indicates that a borrower is financing a large portion of the property value, potentially leading to higher default rates if property values decline. A lower LTV ratio suggests less risk, as it implies that the borrower has a larger equity stake in the property.