What does a higher LTV ratio typically imply for a mortgage loan?

A higher Loan-to-Value (LTV) ratio in a mortgage loan indicates that the borrower is financing a larger portion of the property’s value with debt compared to the equity they have invested. This generally leads to several implications.

One key implication is that with a higher LTV ratio, the borrower has less equity in the property, which is reflected in the third point. Less borrower equity can be a sign of increased risk because there is a smaller financial buffer to absorb market fluctuations. Should property values decline, borrowers may find themselves in a negative equity situation.

Additionally, lenders often perceive higher LTV ratios as riskier. To mitigate this risk, they may require higher interest rates or Private Mortgage Insurance (PMI) to protect against potential losses in the event of default. Thus, the second point about higher interest rates and potential PMI requirements also holds true.

Therefore, the answer D, stating that both B and C are correct, accurately encapsulates the implications of a higher LTV ratio. It highlights the relationship between borrower equity and lender risk while emphasizing the financial consequences both for borrowers and lenders associated with higher LTV ratios.