What does the term 'LTV' commonly refer to in mortgage lending?

The term 'LTV' in mortgage lending stands for "Loan to Value." This ratio is a financial term used to express the ratio of a loan to the value of an asset purchased. In the context of mortgages, it typically represents the amount of the mortgage loan relative to the appraised value or purchase price of the property being financed.

For instance, if a borrower wants to purchase a home worth $200,000 and they seek a loan of $160,000, the LTV ratio would be calculated as $160,000 divided by $200,000, resulting in an LTV of 80%. LTV is a critical factor that lenders consider when determining the risk associated with a loan. A higher LTV ratio may indicate a higher risk for the lender, which can lead to higher interest rates or require mortgage insurance to mitigate that risk.

Understanding LTV is essential for both borrowers and lenders in making informed decisions about mortgage financing and in setting terms that align with the perceived risk of the loan.