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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
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.
Can you refinance without 20 percent 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 a good amount of equity in your home? ›
The home equity stake of the average American homeowner with a mortgage is worth $299,000, $193,000 of which is “tappable” (able to be withdrawn while still maintaining a healthy 20% equity stake). The average homeowner has gained $24,000 in equity since Q4 of 2022.
What is the 80% rule for refinancing? ›
For instance, to meet the 20% equity threshold, you can multiply your home value by 0.8 (80%). Home value x 0.8 = maximum loan amount: For a $300,000 property, your total loan balance can be no more than $240,000. Otherwise, you'll be stuck paying mortgage insurance until you reach 80% LTV.
How do I figure out how much equity I need in my home? ›
Take your home's value, and then subtract all amounts that are owed on that property. The difference is the amount of equity you have. For example, if you have a property worth $400,000, and the total mortgage balances owed on the property are $200,000, then you have a total of $200,000 in equity.
What disqualifies you from getting a home equity loan? ›
High Debt-to-Income Ratio
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. Payment example does not include amounts for taxes and insurance premiums.
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.
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.
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.
How do I know if I have enough 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.
What is a normal amount of equity? ›
Calculating Startup Equity Compensation
Of the equity pool for employees, shareholders may receive the following average percentages of equity in the company by level of seniority: C-suite executives: 0.8% to 5% Vice president: 0.3% to 2% Director: 0.4% to 1%
How much equity is considered rich? ›
Being equity rich means, broadly, having at least 50% equity in your home. For example, if a home's market value is $400,000 and there's $180,000 on the mortgage, then there's $220,000 in equity. The homeowner would be considered equity rich.
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 is required to refinance your house? ›
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.
How much income do you need to refinance a house? ›
To qualify for a refinance, take a look at your debt-to-income ratio. The new monthly mortgage payment shouldn't be more than 30% of your monthly income. To refinance $200K over a 30-year fixed term, you'll need an income of approx. $5,200/month.
How much equity does the average homeowner have? ›
According to the February 2024 ICE Mortgage Monitor report, the average homeowner currently has about $299,000 in home equity, about $193,000 of which is tappable home equity. Keep in mind that the above is the average equity American homeowners have, so yours may be higher or lower depending on a range of factors.
