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Simple English definitions for legal terms
loan-to-value ratio
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A quick definition of loan-to-value ratio:
Loan-to-value ratio: This is a number that shows how much money you borrowed for a mortgage compared to how much your property is worth. For example, if you borrowed $80,000 for a property that is worth $100,000, your loan-to-value ratio is 80%. This number is important because it helps lenders decide how much risk they are taking by lending you money. If your loan-to-value ratio is too high, you may have to buy mortgage insurance.
A more thorough explanation:
The loan-to-value ratio is a percentage that represents the amount of a mortgage loan compared to the value of the property used as collateral for the loan.
For example, if a person takes out an $80,000 mortgage loan on a property that is worth $100,000, the loan-to-value ratio would be 80%. This is typically the highest ratio that lenders will allow without requiring the borrower to purchase mortgage insurance.
The loan-to-value ratio is important because it helps lenders determine the level of risk associated with a mortgage loan. A higher ratio means that the borrower has less equity in the property and is therefore more likely to default on the loan.
Another example of a loan-to-value ratio would be if a person took out a $200,000 mortgage loan on a property that is worth $250,000. In this case, the loan-to-value ratio would be 80% as well.
Overall, the loan-to-value ratio is an important factor to consider when applying for a mortgage loan, as it can affect the interest rate, loan terms, and overall affordability of the loan.