With mortgage rates on the rise, the opportunity to save money with a refinance is shrinking, but it can still make sense for some homeowners. When it comes to refinancing a mortgage, though, home equity matters.
How much home equity do I need to refinance my mortgage?
Home equity is the cash value in your home. For instance, if your home is valued at $300,000 and you owe $200,000, your home would have $100,000 of cash value, or equity. If you don’t have enough home equity, private mortgage insurance, or PMI, may be required. This is a type of insurance borrowers pay to protect the lender in the event the borrower defaults on the loan.
For conventional refinances, you’ll need at least 20 percent equity in your home to avoid PMI. This also means you need a loan-to-value (LTV) ratio of no more than 80 percent.
FHA and VA refinances
For FHA cash-out refinances, mortgage lenders prefer borrowers have 20 percent equity remaining after the refi. Through a VA cash-out refinance, you can access up to 100 percent of your equity.
Refinances for low- to no-equity mortgages
For those who are underwater on a home loan (in other words, you owe more than the home is worth) or have little to no equity, an alternative for homeowners who may be underwater on their mortgage is paying down the amount owed with a personal loan.
A homeowner could take out a personal loan and pay into their home to a point where they have enough equity to conduct the refinance.
After paying down the mortgage and conducting the refinance, you might consider applying for a home equity line of credit (HELOC) on the home and using the funds to help pay off the personal loan. Make sure to get pre-qualified with Stanford Mortgage.
Ultimately, this would lower their effective borrowing interest rate, as they would have brought down the interest rate and loan amount on their home from the refinance.
Bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit, and some lenders have ceased HELOC applications temporarily. Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income allowed for a refinance. If you’re unsure about any of this, consult a financial advisor before proceeding.
The mortgage advisors with Stanford Mortgage are available to answer all your questions.