How is the Loan-to-Value (LTV) ratio calculated?
Correct Answer
B) Loan amount divided by the lesser of the appraised value or purchase price
LTV is calculated by dividing the loan amount by the lesser of the appraised value or the purchase price, then multiplying by 100 to express it as a percentage. Lenders use the lesser of the two values to protect against overpaying relative to market value. A lower LTV indicates less risk for the lender and may allow the borrower to avoid private mortgage insurance (PMI).
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Related Topics & Key Terms
Related Topics:
Key Terms:
Related Concepts
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
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