Loan-to-Value, Down Payments, Equity, and PMI

Loan-to-value measures debt against property value. Equity is the value remaining after secured debt. If one loan equals 80% of the stated value, the remaining 20% is equity in that simplified example—not another 80%.

Jump to: Choose the amount before doing the math · Example: find the loan and down payment · Is equity the same as the original down payment? · How does this connect to PMI? · Check your understanding

Choose the amount before doing the math

For an actual loan, the program determines the value used in underwriting. A purchase LTV often uses the lower of price or appraised value. In an exam exercise, follow its stated value and assumptions. Closing costs and prepaid expenses are separate from the down payment. With multiple loans, distinguish first-loan LTV from combined loan-to-value (CLTV).

Example: find the loan and down payment

A home costs $300,000 and the problem allows an 80% loan, with price used as the value and no second loan.

1. Loan: $300,000 × 0.80 = $240,000.
2. Down payment: $300,000 − $240,000 = $60,000.
3. Down-payment percentage: 100% − 80% = 20%.

Multiplying by 80% correctly finds the loan, but it gives the wrong answer if the question asks for the down payment. Read the requested amount first.

Is equity the same as the original down payment?

They can equal each other at purchase in a simplified example, but they are not interchangeable over time. Later, assume the home is worth $330,000 and the only loan balance is $225,000. Equity is $105,000 and current LTV is about 68.18%. Equity changed through principal repayment and value changes. A fall in value or a new secured loan can reduce equity.

How does this connect to PMI?

PMI protects a conventional lender against borrower default; it is different from homeowners insurance. For covered borrower-paid PMI, a written cancellation request is generally possible when the principal balance reaches 80% of the home’s original value, subject to payment history, current payments, junior-lien, and value conditions. Original value generally uses the lower of purchase price or original appraisal; refinancing uses the refinance appraisal.

Automatic termination generally uses the date the balance is scheduled to reach 78% of original value, provided payments are current. Midpoint termination and investor rules may also apply. A higher current market value does not by itself prove the statutory test is met. FHA mortgage insurance and lender-paid coverage follow different rules. Ask the servicer which rule applies.

Check your understanding

1. Price and applicable value are $250,000. A single purchase loan is 90% LTV. What are the loan and down payment?
2. Value is $400,000, first-mortgage balance $270,000, and second-mortgage balance $30,000. What is equity?
3. Does 80% LTV mean 80% equity?

Answers and explanations

1. $225,000 loan; $25,000 down payment. Closing costs are additional if applicable.
2. $100,000. Subtract both secured debts. Combined LTV is 75%.
3. No. With only that debt, 80% debt leaves 20% equity.

Sources and next steps

Sources checked October 20, 2026. Use current law and program guidance when applying these concepts to a transaction.

• CFPB: PMI cancellation and termination
• CFPB: what PMI covers

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