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Key takeaways
- Home equity is the difference between how much you still owe on your mortgage and the value of your home.
- The specific amount of equity needed to refinance varies based on the type of mortgage refinance you choose.
- Homeowners who do not have enough equity to refinance may be able to pay down their mortgage balance using a personal loan.
With mortgage rates still stubbornly high, it’s unlikely that you’ll be able to save money with a refinance right now. However, you can prepare for a potential refinance by getting familiar with refinancing home requirements.
Specifically, you can get a good handle on how much value you’ll need to have in your house to refinance your mortgage.
How much home equity do you need to refinance?
Home equity is an important variable when you’re seeking to refinance. In general, lenders are more comfortable working with applicants who have more equity — or more of a personal stake — in the home. That’s because lenders view applicants who have paid off more of their homes as less risky. Lenders often want applicants to have at least 20 percent equity before they consider refinancing a loan.
- Home equity is the cash value of your home. For example, if your home is valued at $400,000 and you owe $200,000 on the mortgage, your home has $200,000 of net equity.
- Loan-to-value (LTV) ratio is the expression of how much money you’re borrowing compared to your home’s value. This is an important part of a lender’s considerations when deciding whether to approve a refinance. In general, the required LTV to refinance is 80 percent or lower.
The LTV ratio and home equity requirements for refinancing vary based on the lender and the type of refinance loan you’re seeking.
Home equity requirements by loan type
Here’s how the different types of refinance options and their equity requirements compare:
- 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). This also helps you avoid private mortgage insurance payments on your new loan. You can use Bankrate’s LTV calculator to find out your ratio.
- FHA refinance: For FHA cash-out refinances, mortgage lenders prefer you to have 20 percent equity remaining after the refi.
- VA refinance: Through a VA cash-out refinance, you can access up to 100 percent of your equity.
Refinances for low- to no-equity mortgages
For those who are underwater on a home loan (in other words, you owe more than the home is worth) or have little to no equity, there were two programs — the Freddie Mac Enhanced Relief Refinance Mortgage and the High LTV Refinance Option from Fannie Mae — designed to help. However, both of those programs have been temporarily suspended.
If your LTV ratio isn’t high enough to refinance, you could also turn to a personal loan. “A homeowner could take out a personal loan and pay into their home to a point where they have enough equity to conduct the refinance,” says Joseph Polakovic, owner and CEO of Castle West Financial. After paying down the mortgage and conducting the refinance, the homeowner might consider applying for a home equity line of credit (HELOC) on the home and using the funds to help pay off the personal loan, says Polakovic.
But this kind of no-equity refi — or even refinancing with equity — only makes sense if you can refinance to a lower interest rate. And with the current high-rate environment, now may not be the best time to make this call.
Also, bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit. Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income ratio allowed for a refinance. If you’re unsure about any of this, consult a financial advisor before proceeding.
Home equity and refinancing FAQ
It can be more difficult to get approval for a no-equity refi. When you are underwater on a mortgage it means you owe more than the home is worth. And lenders typically cannot loan more than a home is worth. Freddie Mac and Fannie Mae had programs designed to help homeowners in this situation, but both programs have been paused.
Refinancing with equity makes the application process much smoother. You can increase your home equity by making additional payments on your mortgage to reduce the principal balance owed. You could use any windfalls, such as bonuses or tax returns, to pay down the mortgage faster, or you could make biweekly mortgage payments. Another option is to take out a personal loan and use the proceeds to pay down the balance on your mortgage, which would also increase your equity.
FAQs
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).
Can you refinance with only 10% equity? ›
A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you'll likely need 20% equity in your home. This number is often the amount of equity you'll need if you want to do a cash-out refinance, too.
Can I refinance if I don't have 20% equity? ›
How much equity do I need to refinance a conventional loan? Conventional wisdom says you'll need a minimum credit score of 620 and 20% equity to refinance with a conventional loan, but in fact, you'll only need 20 percent if you want to avoid private mortgage insurance or plan to do a cash-out refinance.
What is the minimum equity for a cash-out refinance? ›
You'll usually need at least 20% equity in your home to qualify for a cash-out refinance. In other words, you'll need to have paid off at least 20% of the current appraised value of the house.
What happens if you don't have enough equity to refinance? ›
Little equity? Consider Federal Housing Administration (FHA) refinancing. You can refinance with an FHA loan even if you have little equity in your home. In fact, the FHA refinance process is streamlined.
Is refinancing easier than getting a mortgage? ›
Refinancing is generally easier than securing a loan as a first-time buyer because you already own the property. If you have owned your property or house for a long time and built up significant equity, refinancing will be even easier.
Do you lose all your equity when you refinance? ›
The bottom line
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.
Is it easier to get a home equity loan than refinance? ›
A home equity loan is easier to obtain for borrowers with a low credit score and can release just as much equity as a cash-out refinance. The cost of home equity loans tends to be lower than cash-out refinancing and can be far less complex. Home equity loans also have drawbacks, though.
Can I borrow from my equity without refinancing? ›
Yes, you can take equity out of your home without refinancing your current mortgage by using a home equity loan or a home equity line of credit (HELOC). Both options allow you to borrow against the equity in your home, but they work a bit differently.
Is it expensive to refinance a mortgage? ›
Refinance closing costs commonly run between 2% and 6% of the loan principal. For example, if you're refinancing a $225,000 mortgage balance, you can expect to pay between $4,500 and $13,500. Like purchase loans, mortgage refinancing carries standard fees, such as origination fees and multiple third-party charges.
Key takeaways
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.
Does a cash-out refinance require closing costs? ›
A cash-out refinance comes with closing costs comparable to your first mortgage. Typically, you can expect to pay between 2% and 5% of the loan amount. So on a $200,000 home loan refinance, you could pay between $4,000 and $10,000 in closing costs.
Can you refinance with 5% equity? ›
However, if your equity is less than 20 percent, and if you have a good credit rating, you may be able to refinance anyway. In this case, the lender may charge you a higher interest rate or make you take out mortgage insurance.
How much equity can I pull out? ›
It depends on how much equity you have and your lender. Regardless, though, you can't take out the full amount of equity — so if you have $100,000 in equity, say, you can't simply access $100,000. Most lenders allow you to borrow 80 percent to 85 percent of your home's appraised value.
How much equity do you need to remortgage? ›
The amount of equity you need varies between lenders. Some will cap the loan to value/LTV (the size of mortgage a lender is prepared to offer you in relation to the value of the property) at 75%, so you'll need to have at least 25% equity, while others will go as high as 90% depending on your circ*mstances.
What is required to refinance a mortgage? ›
To refinance your mortgage, you'll need to meet your lender's refinancing requirements, which will likely include having enough equity in your home and having a debt-to-income ratio of 43% or lower. Kat Tretina is a freelance writer specializing in personal finance.
How much equity do I need to take out of my loan? ›
Typically, though, borrowers must meet the following requirements and have: Possess a home equity stake of at least 20 percent, though some lenders allow 15 percent. A debt-to-income ratio of 43 percent or less. A credit score in the mid-600s or higher.
How much money do you need to refinance? ›
Refinance closing costs commonly run between 2% and 6% of the loan principal. For example, if you're refinancing a $225,000 mortgage balance, you can expect to pay between $4,500 and $13,500. Like purchase loans, mortgage refinancing carries standard fees, such as origination fees and multiple third-party charges.
