What is a loan-to-value ratio and why does it matter?

The loan-to-value ratio, or LTV, is calculated by dividing the loan amount by the appraised value or purchase price of the property, whichever is lower. For example, a 180,000 dollar loan on a 200,000 dollar property equals a 90 percent LTV. LTV matters because higher ratios represent greater risk for lenders: borrowers with less equity are more likely to default, so lenders charge higher rates or require mortgage insurance. Conventional loans above 80 percent LTV require private mortgage insurance. FHA loans allow up to 96.5 percent LTV. Lower LTV ratios qualify borrowers for better terms.