What is a disadvantage of leveraging a loan at 90% LTV?

Leverage at a loan-to-value (LTV) ratio of 90% means that the borrower is financing 90% of the property's value while putting down only 10% as a down payment. This high level of borrowing can significantly increase the risk exposure for the lender and the borrower alike.

A higher LTV ratio indicates that the borrower has less equity in the property, making the transaction riskier. If property values decline, the borrower may owe more on the mortgage than the property is worth, a situation known as being "underwater." This can lead to a higher likelihood of default if the borrower experiences financial difficulties, as there is less cushion to absorb changes in property value or market conditions. Consequently, lenders often charge higher interest rates or require private mortgage insurance (PMI) to mitigate this risk.

In contrast, options that suggest a larger down payment or less interest paid over the loan do not fit the context of high LTV scenarios, as they would imply lower risk profiles. Similarly, stating that no PMI is required is misleading because borrowers with high LTV ratios typically are required to buy PMI to protect the lender from potential losses. Thus, recognizing the higher risk of default associated with a 90% LTV loan is foundational