How much equity do you need to refinance?

If mortgage rates come down further toward 6 percent, some homeowners might save money from refinancing. You can prepare for a potential refinance by determining how much value you’ll need in your house to refinance your mortgage.

How much home equity do you need to refinance?

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.

The LTV ratio and home equity requirements for refinancing vary based on the lender and the type of refinance 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.
• 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 are a variety of options for refinancing:

• FMERR Mortgage: The Freddie Mac Enhanced Relief Refinance (FMERR) program was designed to help homeowners with low or no equity refinance their mortgage for a lower monthly payment or interest rate. However, this program has been temporarily suspended.
• High LTV Refinance Option: The High LTV Refinance Option from Fannie Mae was available to borrowers who paid their existing Fannie Mae mortgage on time, but whose LTV ratio exceeded the amount allowed for a cash-out refinance. This program is currently suspended.
• Personal loan: If your LTV ratio isn’t high enough to refinance, you could get a personal loan, use the funds to pay down your mortgage and refinance. However, this option requires understanding exactly how much new debt (in the form of a personal loan) you can take on while still falling below the maximum debt-to-income ratio allowed for a refinance. After paying down your mortgage and refinancing, you might consider applying for a home equity line of credit (HELOC) and using the funds to help pay off the personal loan.
• FHA streamline refinance: An FHA Streamline Refinance allows existing FHA borrowers to refinance their mortgage with less paperwork and faster closing times than traditional refinances. To qualify for the program, your FHA loan must be at least 210 days old and you can’t have made more than one late payment in the last year.
• VA IRRRL: If you have a VA loan, you might qualify for a VA Interest Rate Reduction Refinance Loan (IRRRL). It allows you to refinance your current VA loan to reduce your monthly payment or switch from an adjustable-rate mortgage to a fixed-rate mortgage.
• USDA streamlined assist refinance: The USDA streamlined assist refinance program lets current USDA borrowers refinance their loans with reduced paperwork and no appraisal requirement. To qualify, you must have made 12 consecutive on-time payments on your existing loan, and the new loan must lower your monthly payment by at least $50.
  

Home equity and refinancing FAQ

• Can I refinance if I have negative equity in my home?

  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.

• Can I increase my home equity before refinancing?

  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.

• How can I calculate my LTV ratio?

  The easiest way to calculate your LTV ratio is to use an LTV calculator. To do this, you’ll enter your home’s market value, your outstanding mortgage balance and any second mortgage balance you may have.