Ariel Skelley/Getty Images
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
Lenders often want applicants to have at least 20 percent equity before they consider refinancing a loan. In general, lenders are more comfortable working with applicants who have more equity — or more of a personal stake — in the home.
Can I refinance without 20% equity? ›
Conventional refinances: As little as 3 percent equity works for a rate-and-term refinance. For a cash-out refi, 20 percent is more the norm. FHA refinances: You'll need 20 percent down to pursue a cash-out refinance, but you can explore rate-and-term and streamlined refis with just 2.25 percent equity.
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.
How much equity do you need to qualify for a home equity loan? ›
To qualify for a home equity loan or line of credit, you'll typically need at least 20 percent equity in your home. Some lenders allow for 15 percent. You'll also need a solid credit score and acceptable debt-to-income (DTI) ratio.
How much equity do you need to refinance an FHA loan? ›
The benefits of refinancing an FHA to a conventional loan
The main benefit of moving to a conventional loan is to remove the mortgage insurance requirement after you have at least 20% in equity.
What is the 80/20 rule in refinancing? ›
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.
How much equity do you have to have to refinance? ›
How much equity should I have? Refinance requirements can differ depending on the lender, type of loan you have and your personal circ*mstances but having 20% equity in your home is typically advised for conventional mortgages. Refinancing with at least 20% equity can help you avoid mortgage insurance payments.
What is the cheapest way to get equity out of your house? ›
A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home's equity.
What is the best way to get equity without refinancing? ›
These include home equity loans, home equity lines of credit (HELOCs), reverse mortgages, sale-leaseback agreements, and Home Equity Investments. Each of these options allows you to tap into your amount of equity without having to refinance your existing mortgage loan.
At what point is it not worth it to refinance? ›
Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.
Poor credit score
Just as with any other loan, home equity lenders will analyze your credit score and credit history when you apply for a home equity loan. Those who apply with lower credit scores will have a harder time getting approved. And, that's especially true for those with credit scores below 620 or so.
What is the monthly payment on a $50,000 home equity loan? ›
Loan payment example: on a $50,000 loan for 120 months at 7.65% interest rate, monthly payments would be $597.43.
What is the monthly payment on a $100,000 home equity loan? ›
If you took out a 10-year, $100,000 home equity loan at a rate of 8.75%, you could expect to pay just over $1,253 per month for the next decade. Most home equity loans come with fixed rates, so your rate and payment would remain steady for the entire term of your loan.
Can I refinance if I don't have 20% equity? ›
While most lenders will offer refinance loans to homeowners, they almost always have LTV requirements. If you have little or no equity in your home, you'll only be able to refinance through certain lenders or refi programs. You could impact your credit.
Is it hard to refinance an FHA loan? ›
To be approved to refinance from an FHA loan to a conventional loan, you'll likely need a debt-to-income ratio (DTI) of 50 or lower and a median credit score of 620 or better. This credit requirement could prove to be an obstacle for some borrowers because FHA credit score requirements are more lenient.
What is the FHA 12 month rule? ›
FHA First Mortgage
Borrower must have owned property for 12 months AND if encumbered by a mortgage made payments for the last 12 months within the month due.
Do you have to put 20 down on a refinance? ›
You can usually qualify for a conventional rate-and-term refinance if you have as little as 3 to 5 percent home equity. This type of refinance just modifies the length and interest rate of the loan. Conventional loans, on the other hand, require at least 20% equity for a cash-out refinance.
Can I refinance if I have negative equity? ›
You'd need to pay off your negative equity before you qualify for a refinance loan. You may also find it challenging to sell your home. When you sell your home, you typically use the sale proceeds to pay off your existing mortgage.
Do you need equity for a cash-out refinance? ›
Determining whether you qualify: Many cash-out refinance lenders require a credit score of at least 620 and at least 20 percent equity in your home. You might find lenders with looser requirements, but you could pay a higher rate as a result.
How do I know if I've reached 20 equity in my home? ›
You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value.
