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How much equity do I need to refinance?

How much equity do I need to refinance? 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:

  1. The type of loan you have;
  2. The type you want;
  3. The purpose of your refinance.

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, and if your loan is owned or backed by Fannie Mae or Freddie Mac, you might be able to refinance with a streamline refinance program. Fannie Mae's program is called their "High Loan-to-Value Refinance Option"; Freddie Mac calls their version "Enhanced Relief Refinance Mortgage". Both have similar structures and restrictions, and are for borrowers with loan-to-value ratios of 97.01% and up.

"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.

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. In the current market, a 20% to 30% equity stake is likely required, but underwriting guidelines can vary from lender to lender and market to market.

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 80 percent," Velez says. "So you could have a loan amount that's 80 percent of the home's value." The former limit was 85%, but this FHA LTV requirement changed in August 2019.

All FHA loans require mortgage insurance (which currently cannot be canceled) so if you have a conventional option available to you, or have at least 20 percent equity, you might not want to refinance into an FHA loan.

However, since FHA does not use risk-based pricing, borrowers with lower credit scores can get the same rock-bottom mortgage rates as someone with great credit, and it might be worth refinancing into the program if the benefits of a new lower rate also cover any mandatory mortgage insurance costs. You can compare FHA loan costs versus conventional loans with PMI.

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. This is called a "cash-in refinance".

"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). This article was revised by Keith Gumbinger.

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