The mortgage loan-to-value (LTV) ratio measures the percentage of a home’s appraised value that a mortgage covers. For example, a $200,000 home with a $160,000 loan has an LTV of 80%. Lenders use this ratio to assess risk and determine loan terms, such as interest rates and down payment requirements. A lower LTV (e.g., 80%) typically signals lower risk, while a higher LTV (e.g., 95%) may require mortgage insurance or higher rates due to increased lender risk.

The LTV ratio is critical because it directly impacts borrowing costs and lender approval. Data from the Federal Housing Finance Agency (FHFA) shows that loans with LTV ratios above 80% accounted for 65% of delinquent mortgages during the 2008 financial crisis, compared to 35% for loans below 80%. This correlation highlights how high LTV ratios can amplify default risks, as borrowers have smaller equity stakes and may struggle to recover costs if property values decline. Additionally, lenders like Fannie Mae and Freddie Mac cap conforming loans at 80% LTV without mortgage insurance, while jumbo loans often allow up to 90% LTV but charge higher interest rates. A 2022 report by the Urban Institute found that LTV ratios exceeding 90% correlated with a 40% higher likelihood of refinancing failure, underscoring the ratio’s role in long-term financial stability. Thus, understanding LTV helps borrowers balance affordability with risk management, ensuring sustainable homeownership.