Do you lose home equity when you refinance your mortgage? (2024)

FAQs

Do you lose home equity when you refinance your mortgage? ›

The bottom line

A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you've built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.

If you have little or no equity in your home, you will only be able to refinance through certain lenders or refi programs. You could impact your credit. The mortgage application process often involves hard inquiries, which can temporarily lower your credit score.

A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home's equity.

Your home equity is the difference between your home's current value and your mortgage balance. If your home's value decreases, your equity can also drop, which can be problematic if you plan to sell or borrow against your home soon.

Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.

There are definitely benefits, including getting a lower interest rate. Here are several other benefits of refinancing a home equity loan: Lower Monthly Payments. Refinancing to a lower interest rate than what you are paying now, means you pay less in monthly payments as you repay the loan.

Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent).

You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.

Home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing are the main ways to unlock home equity. Tapping your equity allows you to access needed funds without having to sell your home or take out a higher-interest personal loan.

Why is taking equity out of your home a bad idea? ›

Your credit score can drop

Depending on your financial situation, a large home equity loan to your credit report can negatively impact your credit score by increasing the amount of available credit you've utilized. That could make it harder to qualify for other loans in the immediate future.

Can you take equity out of your house without refinancing? Yes, there are options other than refinancing to get equity out of your home. These include home equity loans, home equity lines of credit (HELOCs), reverse mortgages, sale-leaseback agreements, and Home Equity Investments.

Calculate your loan-to-value ratio to see if you qualify for loans or refinancing. Lenders usually require an 80% LTV ratio, which equals 20% equity.

Loan payment example: on a $50,000 loan for 120 months at 7.65% interest rate, monthly payments would be $597.43.

You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

High Debt-to-Income Ratio

Your debt-to-income ratio is the percentage of your income that goes toward paying your debts each month. If your debt-to-income ratio is too high, lenders may be concerned about your ability to make your payments. Many lenders look for a debt-to-income ratio of 43 percent or lower.

Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent).

Do all home equity loans require an appraisal? Yes. Lenders require an appraisal for home equity loans—no matter the type—to protect themselves from the risk of default. If a borrower can't make monthly payments over the long-term, the lender wants to know it can recoup the cost of the loan.

Under 20% Equity

You may find that it's worth refinancing even if you don't have much equity if interest rates have dropped significantly since you closed on your mortgage. There are no equity requirements for interest-reduction FHA Streamline refinance loans.

Compared to HELOCs, cash-out refinances are less risky for lenders, meaning they are often able to provide lower interest rates – though you may need to anticipate higher upfront fees in the form of closing costs.