The loan to value (LTV) ratio is the ratio between the loan amount and the total purchase price. It is commonly used when buying a property. The LTV ratio helps lenders assess the risk of lending money for the purchase.
The formula to calculate the loan amount:
\[ \text{Loan Amount} = \text{Purchase Price} - \text{Down Payment} \]
The formula to calculate the Loan to Value (LTV) ratio:
\[ \text{LTV} = \left( \frac{\text{Loan Amount}}{\text{Purchase Price}} \right) \times 100\% \]
Imagine that you want to buy a house that costs $200,000. You have $20,000 available for the down payment. Here’s how you calculate the loan amount and the LTV ratio:
\[ \text{Loan Amount} = \$200,000 - \$20,000 = \$180,000 \]
\[ \text{LTV} = \left( \frac{\$180,000}{\$200,000} \right) \times 100\% = 90\% \]
This means that the loan represents 90% of the market value of the property.