What is the loan-to-value ratio?

• A. The annual interest rate
• B. The relationship between the amount borrowed and the appraised value of the property
• C. The duration of the loan
• D. The fees charged at closing

Answer: (B)

Loan-to-value ratio shows how much of a property's value is being financed. It compares the loan amount to the property's appraised value, usually expressed as a percentage. You figure it by dividing the loan amount by the appraised value (or purchase price, whichever is lower) and multiplying by 100. This ratio helps lenders gauge risk—the higher the LTV, the less equity you have, and the riskier the loan can be for the lender (often influencing mortgage insurance requirements or interest rates).

For example, borrowing $300,000 on a home appraised at $350,000 yields an LTV of about 85.7%. This concept is distinct from the interest rate, loan term, or closing fees, which are different aspects of a loan.