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Loan-to-Value (LTV)

Loan-to-Value is a ratio that compares a current loan value to a current property value which is used to determine the eligibility and amount of a loan that borrowers are able to receive. Loan-to-value ratio (LTV) is calculated by dividing the value of a property mortgage by the appraised value of the property. This ratio is used by mortgage companies and investors at the time of purchase for an investment property. At the time of sale, equity in a property investment can be calculated easily by dividing the loan by the sales price of the property and subtracting that sum from one. If this final sum is multiplied by one hundred, the result reflects a percentage of equity that the investor initially holds in the property. It becomes more difficult at a later time to accurately calculate LTV. The main reason for the difficulty is that property prices tend to fluctuate on an annual basis. Countless studies of individual and categorical real estate prices have demonstrated that the trend of real estate values over several years experience positive appreciation in a region with average economic health. The LTV is critical to an investor on the day an investment property is purchased. Data can be collected over time to monitor the trend of an individual investment and may be evaluated in relation to comparable properties. Neighborhood real estate cycles that include development, appreciation, devaluation, and revitalization occur over a much longer period of time. A future LTV should consider the surrounding area of the investment property as well as the stage of the real estate cycle. A future LTV should also consider that appraisals often include comparable properties outside the immediate area.

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