Picture your home loan on one side of a see-saw, and the home itself on the other. That’s a simplified version of LTV — “Loan to Value”. It’s one of the key ratios involved in setting loan amounts.
Lenders frequently set LTV limits. If you know the ratio, you know the upper boundary of loan size, like this:
- “LTV on this $500K home is 80%.” 80% x $500K = $400K max loan. Buyer would need at least $100K down for that loan.
LTV also measures equity. If you put $100K down for the example above, you have $100K equity in the home.
As a result, higher-LTV loans may require mortgage insurance. With an LTV greater than 80%, the risk of default is high because the homeowner has a lower “stake” in paying off the mortgage.