Many homeowners think they need a big chunk of equity to refinance. But in fact, it's possible to refinance with very little equity or even none at all.
How much you'll need depends on a number of factors, says Michelle Velez, sales manager at W.J. Bradley, a mortgage company in San Mateo, California.
"It's a complicated answer," Velez says. "There are a lot of different things to mull around."
Two of those factors are:
- The type of loan you have
- The type you want
Each loan type -- conventional, FHA or VA -- has different requirements.
How much equity do I need to refinance a conventional loan?
Conventional wisdom says you'll need 20 percent to refinance with a conventional loan, but in fact, you'll only need 20 percent if you want to avoid mortgage insurance or plan to do a cash-out refinance.
With mortgage insurance, you can refinance with as little as 5 percent equity, says David Krichmar, mortgage banker at CORE Lending in Conroe, Texas.
If you're pulling cash out, "you pretty much have to be at 80 percent loan-to-value," Velez says.
If you have very little equity or you're underwater, you might be able to refinance with the Home Affordable Refinance Program (HARP).
"If it's a rate-and-term refinance and the existing loan is owned by Fannie Mae or Freddie Mac, you can still do the higher loan-to-value," Velez says.
You'll have to act soon. HARP is scheduled to expire December 31, 2016.
How much equity do I need to refinance a jumbo loan?
A conventional loan that exceeds the Fannie Mae and Freddie Mac conforming loan limit is known as a jumbo loan. Lenders set their own guidelines for these non-conforming loans, so you'll have to shop around to find out how much equity you'll need to refinance.
How much equity do I need to refinance an FHA loan?
FHA loans, insured by the Federal Housing Administration, allow refinancing homeowners to push the equity envelope.
The FHA offers the FHA streamline refinance for loans it already insures. No appraisal is required, so homeowners can refinance with very little equity, no equity, or even negative equity.
"Even if you owe twice what your home is now worth, the FHA will refinance your home without added cost or penalty," the agency's website explains.
For streamline refinances, your loan must be current, no cash-out is allowed, and closing costs cannot be added to your loan amount.
For a standard FHA refinance, "you can pull cash out on an FHA loan to 85 percent," Velez says. "So you could have a loan amount that's 85 percent of the home's value."
All FHA loans require mortgage insurance so if you have at least 20 percent equity, you might not want to refinance into an FHA loan.
How much equity do I need to refinance a VA loan?
The U.S. Department of Veterans Affairs (VA) also offers a streamline refinance known as the VA Interest Rate Reduction Refinance Loan (IRRRL). You must have an existing VA loan and refinance into a new VA loan to use this program, according to the VA website.
No appraisal is required and you can add your closing costs and VA funding fee to the loan amount, but you can't take cash out. (The funding fee can be waived in some cases.)
If you've moved out of your VA-financed home, you'll need to certify that you occupied the home as your residence at one time.
Can I add closing costs to my refinance loan amount?
Closing costs generally can be paid upfront or financed through a slightly higher interest rate or larger loan amount.
If you add your closing costs to your new loan, you'll need more equity.
George Thoma, a loan officer at Mann Mortgage in Reno, Nevada, recommends 23 percent to avoid mortgage insurance, too.
"I'm not saying the closing costs will be 3 percent," he says. "I'm saying have a little cushion."
Can I bring cash to closing to increase my equity?
If you don't have enough equity to refinance into the loan you want, you can beef up your stake by bringing cash to the transaction.
"If it makes sense for you financially, you can easily do that," Krichmar says. "There would be no rule against doing that."
(Image: Karen Roach/iStock)
- HSH.com’s annual outlook: 2019 Mortgage and Housing Market Forecasts
At the start of each year, HSH.com details the important factors we think are most likely to influence the mortgage and real estate markets in the coming year. Come each July, we review to see if our expectations are being met or not.
- What is a rate and term refinance?
Homeowners have a variety of reasons for refinancing and each reason can indicate that one refinance option or another makes the most sense.
- What is HARP and do I qualify for a HARP loan?
Thousands of homeowners are still eligible to refinance under HARP. Are you one of them? Time is running out!
- How quickly can you refinance after a bankruptcy?
We have received a lot of questions over the years regarding how quickly you can refinance a mortgage following bankruptcy.
- 9 ways to save on closing costs
Nine tips on how to save on your mortgage’s closing costs.