Home LoansMortgage Refinance

Refinancing with Low Equity

Refinancing with low equity might seem impossible. But in fact, many homeowners refinance without much, if any, equity in their home. You might be able to do so as well.

If your equity is thin, you probably won’t be able to get cash out when you refinance. Instead, refinancing could help you lock in a fixed rate, lower your interest expensive or monthly payment, shorten or lengthen your loan term, or reduce your mortgage insurance premium.

Different types of mortgages have different requirements to refinance. Some types require 10 percent equity, whereas others allow much less and some don’t require any equity at all.

Your Home Equity

To calculate your equity percentage, divide your current loan balance by the current market value of your home.

If you have more than one loan, use the total of all your unpaid balances.

To estimate your home’s value, use recent sales prices of homes that are similar to yours, asking prices for similar homes that are on the market, recent property tax valuations of your home and your neighbor’s homes, and local realty agents’ price opinions. How much you paid for your home, spent for home repairs or improvements, or believe your home might be worth in the future aren’t relevant factors.

Low-equity Refi Options

Loans that are insured or guaranteed by a federal government agency usually allow you to refinance with less equity. The three main examples are:

• FHA loan, insured by the Federal Housing Administration.

• VA loan, guaranteed by the U.S. Department of Veterans Affairs.

• USDA loan, backed by the U.S. Department of Agriculture.

Refinancing with low equity also depends on the type of loan you currently have, your loan amount and cash-in or cash-out preference, and whether you’re willing to pay for mortgage insurance, which protects the lender’s interest in your loan.

The FHA and VA both offer what’s known as a streamline refinance, which enables you to exchange the loan you have for a new loan of the same type. A streamline refinance offers easier guidelines to qualify, fewer documentation requirements and no appraisal.

If you need a jumbo loan, which exceeds the loan limit for the type of loan you want, you might need more equity to refinance. Loan limits vary by loan type and county. In the case of a VA loan, the crucial hurdle is the loan guaranty amount, which also can vary by county.

If you don’t have enough equity to get the refinance loan you want, you might be able to bring cash to closing to increase your equity in your home. This strategy is known as a “cash in” refinance.

A loan that allows you to refinance with low equity might require mortgage insurance or a funding fee. Mortgage insurance is a cost you pay monthly. A funding fee typically is paid upfront and can be financed as part of your loan amount. Both costs incentivize lenders to offer low or zero down loan programs by limiting their risk of loss if the borrower doesn’t repay the loan.

Get Lender’s Help

If you’re not sure whether you have enough equity to refinance, discuss your concerns with your lender. You might find out that you can refinance with the equity you have, even if it’s not a lot.

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