What does the loan-to-value (LTV) ratio measure?

The loan-to-value (LTV) ratio is a financial term used to assess the risk associated with a mortgage loan. It specifically measures the loan amount relative to the property's appraised value. This ratio is critical for lenders because it provides insight into how much equity a borrower has in the property as compared to the amount they are borrowing.

When the LTV ratio is high, it indicates that the borrower has less equity and a higher risk of defaulting, as they owe a larger portion of the property's value. Conversely, a lower LTV ratio suggests that a borrower has more equity, which typically reflects lower risk for the lender. The LTV ratio is foundational in determining loan approval, interest rates, and the need for private mortgage insurance (PMI) in some cases.

In contrast, measuring a borrower's credit score, total interest paid, or comparing income to debt involves different metrics and focuses, and thus do not pertain to what the LTV ratio specifically measures. These aspects are important in evaluating a borrower's overall creditworthiness and financial health but are distinct from the relationship between the loan amount and property value represented by the LTV ratio.