How much equity do you need to refinance?

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 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 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 a 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 this, consult a financial advisor before proceeding.

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. Once you click the “Calculate” button, the calculator will give you your LTV ratio.