Mortgage Financing - Loan to Value Ratio

Loan to Value Ratio

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. The loan to value ratio affects the terms of your loan in that the lower the LTV the lower your interest rate may be.

Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment. The LTV ratio reflects the amount of equity borrowers have in their homes as well as how much money they must put down on the home. The higher the LTV ratio, the less cash homebuyers are required to pay out of their own funds.

So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.