The financial sector and mortgage investment industry use the loan-to-value ratio to assess the lending risk of mortgages. Calculate the loan-to-value ratio by dividing the mortgage amount by the property's appraised value.

Lenders evaluate a mortgage's loan-to-value ratio before they underwrite the loan. Generally, borrowers with lower loan-to-value ratios qualify for lower mortgage rates. Borrowers with higher loan-to-value ratios have higher mortgage rates.

Borrowers who have lower loan-to-value ratios are considered less risky to lenders because they have more equity in their properties and are less likely to default on their loan. In the event that borrowers default on their loans, lenders would have a better chance of selling the property in foreclosure for at least as much as the lenders are owed for the loan amount.

On the other hand, higher loan-to-value ratios pose higher risk levels for the lender. If borrowers with higher loan-to-value ratios default on their loan, the lenders are less likely to sell the properties for the amount that they are owed for the loan amount.

For example, assume bank ABC loans out money to two property buyers. Buyer A needs to borrow $100,000 to purchase a $120,000 property, while buyer B needs to borrow $150,000 to purchase an $800,000 property. Buyer A's resulting loan-to-value ratio is 83.33% ($100,000/$120,000 * 100%), whereas buyer B's loan-to-value ratio is 18.75% ($150,000/$800,000 * 100%).

Bank ABC considers buyer A's mortgage loan to have a higher risk level because it has less equity in the property, and it may prove difficult to sell the property in the event of the buyer defaulting on his loan.