How much equity do you need to refinance?
Quick insights
- Most mortgage providers prefer borrowers to have a certain amount of equity in their home before refinancing, depending on whether it’s a cash-out or no cash out refinance.
- Your loan-to-value (LTV) ratio plays a crucial role in refinancing eligibility and mortgage interest rates.
- Government-backed loan programs like FHA and VA loans may allow refinancing with little to no equity.
You’ve been paying your mortgage for a while, and now you may be wondering—could refinancing your mortgage save you money? Maybe interest rates have dropped, or your home’s value has increased. However, before you get started with the refinancing process, you'll want to take a moment to identify how much home equity you have. Equity has the power to open the door to better interest rates, lower monthly mortgage payments or even cash in your pocket. Let’s break down how much equity you really need to refinance, and why it matters.
Understanding home equity and its importance in refinancing
Home equity is the difference between your home’s current market value and the remaining balance on your mortgage. It’s a key factor loan providers consider when you apply for refinancing. The more equity you have in your home, the more likely you are to qualify for lower interest rates and better loan terms. Whether you’re looking to consolidate high-interest debt, pay for home improvements or reduce your monthly mortgage payments through a lower-rate loan, equity can serve as a valuable tool.
How much equity do you need to refinance?
Refinancing your home loan can lower your interest rate, reduce your monthly mortgage payments or even help you tap into your home’s equity. Before you apply for refinancing, here are some things to know:
- General equity requirements: Most conventional loan providers prefer that you have a certain amount of equity in your home to refinance, depending on whether it’s a cash-out or no cash out option. For example, 20% equity is generally required for a cash-out refinance. This means you have paid off 20% of your home’s value and owe 80% or less. Having more equity in your home usually gives you access to better loan terms.
- Loan-to-value (LTV) ratio: Mortgage lenders use the loan-to-value (LTV) ratio to determine your home equity. To calculate it, divide your current loan balance by your home’s appraised value. For example, if your home is worth $300,000 and you owe $240,000, your LTV is 80%, meaning you have 20% equity.
- Exceptions to the 20% rule: Some government-backed loans offer more flexible refinancing options. For instance, FHA Streamline Refinance and VA Interest Rate Reduction Refinance Loan (IRRRL) programs may allow you to refinance with low or no equity, depending on your eligibility and loan history.
How to calculate your home equity?
Before refinancing your mortgage loan, it’s essential to understand how much equity you actually have in your home. Here’s a simple way to calculate your home equity:
- Determine your home’s current market value: Use online home value estimators, speak with a local real estate agent or order a professional appraisal to get an accurate estimate of what your home is worth today. Note, even if you order your own appraisal, your lender will require a new appraisal that they will order to use for your LTV.
- Calculate your outstanding mortgage balance: Check your most recent mortgage statement or contact your loan provider to find out exactly how much you still owe.
- Use the formula:
- Home equity = Current market value – Mortgage balance
- Example: If your home’s current market value is $350,000 and you still owe $270,000, your equity is $350,000 - $270,000 = $80,000
- That means you have about 22.8% equity in your home ($80,000 / $350,000 = 22.8%). This is likely enough to meet most refinancing requirements set by lenders.
Home equity requirements by loan type
While 20% equity is the typical standard for most refinancing options, the amount you need can vary depending on the loan type. When it comes to refinancing, the purpose of the refinance is just as important, whether it’s a rate-and-term refinance (to lower your mortgage interest rate or change the loan term) or a cash-out (to convert equity into cash). Here are the requirements by loan type:
Conventional loan refinance: requirements
Rate-and-term refinance: Most mortgage providers prefer at least 5-20% equity (an LTV of 80-95%). If you have less than 20% equity, you may still qualify, but you’ll likely need to pay private mortgage insurance (PMI).
FHA loan refinance: requirements
- Rate-and-term refinance (FHA Streamline): FHA Streamline refinancing is designed for current FHA borrowers who want to lower their mortgage interest rate or switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan. In most cases, no appraisal or equity verification is required, but some loan providers may still set minimum equity or credit standards. You must demonstrate a proven record of paying mortgage payments on time, and there must be a tangible benefit to you such as a lower monthly mortgage payment or shorter loan term. You may be able to use the streamline option on your primary or non-owner-occupied property.
- FHA cash-out refinance: Generally, an FHA cash-out refinance requires at least 20% equity in the home, with a maximum LTV of 80%. Unlike the streamline option, this refinance requires a full credit review, income documentation and a formal home appraisal. It’s available to both FHA and non-FHA borrowers who meet the loan program guidelines. FHA cash-out is available only for your primary residence.
VA loan refinance: requirements
- Rate-and-term refinance (VA IRRRL): No equity is required for veterans, active-duty service members and certain surviving spouses. This is for existing VA borrowers who want to reduce their interest rate or switch from an ARM to a fixed-rate mortgage. In most cases, an appraisal is not required. This option is available for your primary residence or a property that you had previously occupied as your primary residence.
- VA cash-out refinance: This refinancing option allows you to refinance up to 90% of your home’s value (sometimes 100% depending on the loan provider). Keep in mind that a full credit check, income verification and appraisal review are required. This option is used when you want to take cash out on your existing mortgage or when you want to do a no cash out refinance of your non-VA mortgage. VA cash-out is available only for your primary residence. However, the VA does require you have an existing lien on the property, as you may not use this option for a property owned free and clear.
Refinancing options for low- to no-equity mortgages
Don’t have 20% equity in your home yet? You may still have a few refinancing options. These refinancing programs are designed to help homeowners with little or no equity refinance, depending on the loan type and the borrower’s eligibility:
- FHA no cash out refinance: This allows for appraisal/credit review but up to 97.75% for any existing mortgage.
- High LTV refinance option: The High LTV Refinance Option from the Fannie Mae program is currently suspended and no longer accepting new applications. However, similar refinancing options like Fannie Mae RefiNowOpens overlay or Freddie Mac Refi Possible® Mortgage may still help qualifying borrowers with high LTVs and lower incomes refinance, depending on the loan applicant’s eligibility.
- VA IRRRL: This refinancing program is available to eligible veterans, service members and certain spouses with existing VA loans. The loan program typically doesn’t require an appraisal or a specific equity amount. It’s designed to streamline the refinancing process and lower the monthly interest rate, but individual loan providers may have their own guidelines.
- Personal loan (non-mortgage alternative): If refinancing isn’t available because you have low or no equity in your home, a personal loan may help consolidate debt or cover large expenses. These aren’t tied to your home’s value, but they typically come with much higher interest rates and shorter repayment terms. Please note that Chase does not offer personal loans.
In summary
Equity plays a key role in whether you are eligible to refinance your home loan. While 20% is the gold standard, you may still qualify with less equity in your home, especially if you apply through government-backed options. Understanding your home’s value, calculating your equity and knowing your loan options can help you navigate home refinancing with confidence.
