What does the loan-to-value ratio represent?

The loan-to-value ratio is a financial term that expresses the relationship between the amount of a mortgage and the appraised value of the property securing the loan. Calculated by dividing the loan amount by the property's value, this ratio provides insight into the risk level associated with the mortgage. A higher loan-to-value ratio generally indicates that a borrower has less equity in the property and poses a greater risk to lenders, who may require private mortgage insurance (PMI) when the ratio exceeds a certain threshold, commonly 80%. Understanding the loan-to-value ratio is essential for evaluating lending risks and for potential homeowners assessing their financial situations and affordability.