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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).
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.
Can you only refinance if you have 20% equity? ›
When it comes to refinancing, a general rule of thumb is that you should have at least a 20 percent equity in the property. However, if your equity is less than 20 percent, and if you have a good credit rating, you may be able to refinance anyway.
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.
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.
Can I refinance my home with no equity? ›
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.
Can you refinance with 5% equity? ›
For instance, if you're looking to refinance to a conventional mortgage you only need 5% equity. However, you'll likely get a higher interest rate and an added cost of mortgage insurance.
What's the difference between home equity and cash-out refinance? ›
Cash-out refinances are first loans, while home equity loans are second loans. Cash-out refinances pay off your existing mortgage and give you a new one, while a home equity loan is a separate loan that's considered a second mortgage. Cash-out refinances have better interest rates.
Do you need a down payment to refinance? ›
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.
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.
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.
What disqualifies you from getting a home equity loan? ›
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.
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 with 5% equity? ›
For instance, if you're looking to refinance to a conventional mortgage you only need 5% equity. However, you'll likely get a higher interest rate and an added cost of mortgage insurance.
Do you have to put 20% down to refinance? ›
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.
What are the requirements to refinance your home? ›
Your home equity must be sufficient: Typically, your home's market value must exceed your mortgage balance by anywhere from 3% to 20% You need a decent credit score: The minimum credit score to refinance typically ranges from 580 to 680, depending on your lender and loan program.
Can you refinance 100% of home value? ›
In general, lenders will let you draw out no more than 80% of your home's value, but this can vary from lender to lender and may depend on your specific circ*mstances. One big exception to the 80% rule are VA cash-out refinances, which let you take out 100% of your existing equity.
