Real Estate Math
A Pennsylvania buyer makes a $40,000 down payment on a $320,000 home. What is the loan-to-value (LTV) ratio?
A12.5%
B75%
C87.5%✓ Correct
D80%
Explanation
LTV = Loan Amount divided by Property Value. Loan Amount = $320,000 minus $40,000 down payment = $280,000. LTV = $280,000 divided by $320,000 = 0.875 = 87.5%. At 87.5% LTV, this conventional loan exceeds the 80% LTV threshold, so the lender will require Private Mortgage Insurance (PMI) to protect against default risk. The higher the LTV, the greater the lender's risk and typically the higher the interest rate charged to the borrower.
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