How Much Equity Do You Need to Refinance?

How Much Equity Do You Need to Refinance?

While not a requirement with every type of mortgage loan, it's wise to have at least 20% home equity before you refinance. Having 20% equity means the amount of your mortgage you've paid down is equivalent to at least 20% of your home's current value. Refinancing with less than 20% equity is possible, but lenders will usually require you to carry private mortgage insurance (PMI) on the new mortgage.

Mortgage Refinance Loan-to-Value (LTV)

Another way of thinking about home equity is loan-to-value ratio (LTV). That's the percentage of your home's value that you're planning to borrow versus what you own. To refinance, your home's LTV shouldn't exceed 80%, meaning your loan amount after refinancing should be, at most, 80% of the home's appraised value.

The 20% home equity/80% LTV rule for refinances applies to conventional loans, particularly cash-out refinance loans that allow you to get a new mortgage with a larger balance than you previously had and receive cash back. But you can refinance with less equity if you choose another loan type, such as a:

• Conventional rate-and-term refinance
• FHA streamline refinance
• VA loan refinance

More on these low- or no-equity refinance options below.

Learn more: When Should You Refinance Your Mortgage?

How to Calculate Your Home Equity

To determine your home equity, find out how much your home is worth using online tools like Zillow or Redfin, getting help from a real estate agent or hiring a home appraiser. Then subtract your outstanding loan amount from that number.

Example: If your home is worth $350,000 today and you still owe $200,000, you have $150,000 worth of equity in your home. That equates to about 43% equity and an LTV of 57%. You'd be well within most lenders' equity requirements and would likely qualify for a refinance.

Equity Requirements by Loan Type

Here's how much equity you need to refinance the following loan types:

• Conventional loan: You'll need at least 20% home equity to qualify for a cash-out conventional loan refinance, and at least 3% home equity to qualify for a rate-and-term, or traditional, conventional loan refinance without a cash disbursement. You will pay PMI if you choose a rate-and-term refinance and have less than 20% home equity.
• FHA loan: FHA cash-out refinance loans require 20% equity. But you can qualify for an FHA rate-and-term refinance, either as a current conventional loan borrower or an FHA borrower, with just 2.25% equity. An FHA streamline refinance does not have a specific home equity requirement, and lenders determine whether you qualify based on your payment history and the likelihood your new loan will save you money.
• VA loan: VA loan home equity requirements are extremely flexible. VA loan borrowers can qualify for a cash-out refinance or rate-and-term refinance with no equity in their homes, according to the U.S. Department of Veterans Affairs (VA). But the individual lenders that provide VA loans directly to borrowers may set stricter limits.
• USDA loan: If you're a current USDA loan borrower, you can refinance up to the new appraised value of your home when you choose a rate-and-term refinance. There's no equity requirement for a USDA streamline refinance, which is an especially good option for borrowers with poor credit.

Low- to No-Equity Refinancing Options

Let's explore low- and no-equity refinancing options in more detail. These government-backed refinancing programs include:

• FHA streamline refinance: As an existing FHA loan borrower, you can refinance with limited paperwork and, potentially, no credit check, appraisal or income verification through an FHA streamline refinance. To qualify, you'll need to demonstrate that your monthly mortgage payment will decrease by at least 5% or that refinancing will convert your adjustable-rate mortgage (ARM) to a fixed-rate mortgage whose rate is no more than 2% higher than your previous one.
• VA Interest Rate Reduction Refinance Loan (IRRRL): Similar to an FHA streamline refinance, the VA's IRRRL program is for existing VA borrowers who want to either lower their current interest rate or refinance from an ARM into a fixed-rate loan. You aren't required to get a credit check or home appraisal, meet equity requirements or pay upfront fees, as you can add them to the loan amount when refinancing. An IRRRL also costs less than other refinances and even other VA loans, since it comes with lower closing costs. That includes a lower funding fee, a type of origination fee specific to VA loans, than you paid for your original VA-backed mortgage.
• USDA streamline refinance: Like other streamlined government-backed refinance programs, the USDA streamline refinance doesn't require an appraisal, inspection or a certain amount of home equity. There are two types: a traditional streamline loan and the streamline-assist loan. The traditional streamline refinance requires a credit check and on-time payments for the previous six consecutive months. The streamline-assist program doesn't require a credit check, but you must have made on-time mortgage payments for the previous 12 months and you must demonstrate that your mortgage payment will decrease by at least $50 when you refinance.
• USDA rate-and-term refinance: Unlike a USDA streamline refinance, a rate-and-term refinance requires a new appraisal. But you don't need to demonstrate that you'll benefit from a refinance to qualify. It also allows you to add subsidy recapture payments to the amount you refinance. That means that if the USDA asks you to pay back some or all of the subsidy, or payment assistance, you've received, you can pay it off over time as part of your refinance loan. Subsidy recapture may happen if, for example, one of the loan's co-borrowers dies.

Learn more: Can I Refinance if I'm Behind on Mortgage Payments?

The Bottom Line

There are circumstances in which you'll need to meet strict home equity or LTV requirements to refinance, and there are also many opportunities to refinance with limited or no equity. Whenever you choose to refinance, make sure it fits your goals—whether that's removing PMI from your loan, taking out cash to consolidate high-interest debt or getting a meaningfully lower interest rate. Check your credit report and FICO^® Score^☉ before pursuing a refinance, too, since your creditworthiness will help dictate whether you'll qualify, and how valuable refinancing will be.