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Here’s How to Refinance a Mortgage with No Equity
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If you’re considering a mortgage refinance but don’t yet own enough of your home’s value, your first step is to learn how to refinance a mortgage with no equity. While the process can be a bit trickier without much (or any) equity established, it’s well worth the effort for many borrowers, helping them to save money on interest, get out of debt sooner, and even lower their monthly mortgage payments.
So what sort of options are available when you want to refinance a home with low or no equity?
How to refinance a mortgage with no equity: 5 options
Your home’s equity is essentially the portion of your home that you’ve paid off. It also represents the amount of money you would pocket after selling your home now. If you purchased your home for $300,000 five years ago, and now owe $250,000 on your mortgage, you have $50,000 in equity.
The more equity you have built up in your home, the more financial options you have available to you. But what if you want to refinance with low equity, no equity or even negative equity — meaning you’re underwater on your loan? Here are five avenues to consider first if you’re interested in refinancing a mortgage without equity.
- Fannie Mae High LTV Refinance option (HIRO)
- Freddie Mac Enhanced Relief Refinance mortgage
- FHA streamline refinance
- VA IRRRL
- USDA Streamlined Assist refinance
1. Fannie Mae High LTV Refinance option (HIRO)
If you are already paying on an existing Fannie Mae mortgage, and have little or no equity established in your home, the Fannie Mae LTV Refinance program* may be a good fit. This program, also known as HIRO, is offered to homeowners who would benefit from a lower interest rate, a shorter amortized term, a reduced monthly payment (principal and interest), or a more stable mortgage loan product (such as shifting from an adjustable rate to a fixed rate).
In order to qualify, borrowers must be in good standing with no 30-day delinquencies in the last six months. Depending on whether the home is an investment property, second home, or your primary home, acceptable minimum loan-to-value (LTV) ratios for the program range from 75.01% to 97.01%.
*Due to low volume, Fannie Mae has temporarily paused the High LTV Refinance program. It is expected to resume in the near future; updates will be available on the Fannie Mae website.
2. Freddie Mac Enhanced Relief Refinance mortgage
If you have an existing Freddie Mac home mortgage loan, and don’t have enough equity in your home to take advantage of the standard Freddie Mac no-cash refi, there’s the Freddie Mac Enhanced Relief Refinance mortgage*. While this program is open to any high-LTV Freddie Mac borrowers, it specifically aims to assist homeowners with low (or no) equity due to declining housing prices.
With this refinance mortgage option, borrowers can reduce their principal and interest monthly payment, lower interest rates, or shift to a more stable mortgage product.
This program is available to borrowers in good standing who have a minimum LTV of between 75.01% and 97.01%. The maximum LTV ratio for adjustable rate mortgages is 105%; fixed-rate mortgages have no maximum LTV.
*Freddie Mac announced in early 2021 that they are pausing this program until further notice.
3. FHA streamline refinance
If your credit or LTV ratio disqualifies you from refinancing with a traditional lender, the Federal Housing Administration may offer an option in the form of an FHA loan. These loans, offered through lenders that are backed by the assurances of the federal government, still have desirable interest rates and may get you refinanced with up to a 95% LTV ratio.
The FHA streamline refinance program provides refinancing for homeowners who already have an FHA mortgage in good standing, who are interested in loan terms that are better than their existing loan’s terms. While the FHA doesn’t allow lenders to roll the closing costs from a streamline refi into the new mortgage loan, some lenders are still able to offer refinances with no out-of-pocket costs by simply charging a higher interest rate.
4. VA IRRRL
Administered by the U.S. Department of Veterans Affairs (VA), an interest rate reduction refinance loan (IRRRL) may be sought by veterans who have an existing VA loan on a home that they’ve occupied at some point. This program allows veteran borrowers to potentially reduce their interest rates, lower monthly principal and interest payments or move from a variable- to a fixed-rate loan.
The VA IRRRL prohibits you from pulling cash out of your refinance, but does let you roll the costs of the process into the new loan. As a result, borrowers will pay nothing out-of-pocket upfront. Additionally, the VA doesn’t require an appraisal or a credit check.
5. USDA Streamlined Assist refinance
For homeowners who live in eligible rural areas, the USDA streamlined assist refinance program can provide access to refinance loans up to 100% of your home’s value, with as low as 0% down. These refinance loans are backed by the U.S. Department of Agriculture, though they are underwritten by various lenders, such as banks.
To qualify for a USDA Streamlined Assist mortgage refinance, your existing loan must be financed with either a USDA Guaranteed or Direct Loan. Your household income cannot exceed local moderate-income limits, according to your area, and you’ll need to apply through a USDA-approved lender.
Pros and cons of no-equity refinance loans
If you want to refinance a mortgage with no equity, there are a few important things to keep in mind.
You can lower your interest rate. If rates have dropped since you purchased your home or if your credit has improved, a refinance may enable you to lower your mortgage loan interest rate. This could save you thousands over the course of your repayment.
You may be able to reduce your monthly payment. Depending on the refinance loan for which you qualify and the terms you choose, you may be able to reduce your monthly mortgage payment. This can free up your cash flow or even make it easier to contribute extra payments to your principal balance.
You could switch to a more secure mortgage loan product. If you currently have an adjustable-rate mortgage (ARM), refinancing to a fixed loan product allows you to lock in your rate for the duration of your term.
You could shorten your loan term. Refinancing may enable you to reduce your overall repayment term, helping you pay off your home earlier and, in some cases, for less interest.
You may pay more in fees. Your refinance will likely involve closing costs, which may or may not be able to be rolled into your new mortgage loan. These can increase your home’s total cost and may involve an out-of-pocket payment; if you don’t plan to stay in your home for much longer, these fees may exceed any potential refi savings.
You could be in debt for longer. Depending on the refinance terms you choose, you may wind up extending your mortgage repayment term. This means that it will take longer to pay off your home entirely.
You will have limited options. While most lenders will offer refinance loans to homeowners, they almost always have LTV requirements. If you have little or no equity in your home, you will only be able to refinance through certain lenders or refi programs.
You could impact your credit. The mortgage application process often involves hard inquiries, which can temporarily lower your credit score. Replacing your long-standing mortgage with a new home loan can also have an effect.
6 tips to prepare for the refinance process
If you want to boost your chances at a mortgage refinance approval — especially if you’re trying to refinance your mortgage without equity — there are a few boxes to check before you apply. Here are our top mortgage refi tips.
1. Decide if refinancing is the right move
Are you thinking about refinancing? You can use our refinance calculator to see if it makes sense for you to refinance your current home loan, and how much you could potentially save. This can be especially helpful if you plan to sell your property in a few years, and want to ensure that any fees involved with your refinance will be recouped with savings.
2. Figure out your home’s value
In order to ascertain where you stand on your equity, you first need to know the value of your home. The most accurate way to learn your home’s current market value is to get a home appraisal. In fact, a professional appraisal is an essential component of refinancing, but you can also pay a few hundred dollars out of pocket before you begin the process to see where you stand.
Of course, before you shell out for an appraisal, it’s worth it to get a rough (but free) estimate of your home value. You’ll probably see a lot of variability in estimates, so use a combination of these resources to narrow in on a price point for your house:
3. Calculate your current equity
The amount of equity you have in your home is a critical factor in processing your refinancing application. And, once you know the current market value of your home, it’s easy to compute both your home equity and your home-equity ratio.
To calculate your equity, simply subtract your remaining mortgage balance from your home’s market value. For example, if you owe $189,000 on your home and its current value is $200,000, you have $11,000 in equity built up.
Your home equity ratio is simply the number that represents what percentage of your home you actually own. Take that home equity number we just calculated and divide it by the home’s market value. So, in this case, divide $11,000 by $200,000 — you get 0.055, which means that you have 5.5% equity built up in your property.
4. Calculate your loan-to-value ratio
Your lender will calculate your LTV, or loan-to-value ratio, when reviewing your refinancing application. However, calculating it on your own ahead of time is very simple.
To calculate this ratio, divide your remaining loan balance by your home’s current value. So if you still owe $189,000 on your mortgage loan and your home’s market value is $200,000, your LTV is 94.5% (189,000 / 200,000 = 0.945).
You can also calculate this number by taking the equity percentage we calculated in step four (5.5%) and subtracting that from 100.
5. Research your available options
You may be asking, how much home equity do I need to refinance my house? The answer depends largely on the lender and/or program(s) you choose. Once you know your current LTV, you can begin researching your eligibility and options.
You could be eligible for certain government programs or — depending on your current LTV and the equity needed to refinance — you may even be able to go the conventional loan route.
6. Rate shop
It’s always smart to shop around for the best possible rate anytime you are taking out or refinancing a loan. Though your options will be limited if you’re trying to refinance a mortgage without equity, you may be able to rate shop and find additional savings if you have some equity built up in your home.
Platforms like LendingTree make it easy to shop around for rates with multiple lenders at once. If you find loan terms that you like, you can finalize your application through that lender directly.