How much home equity do you need to refinance your mortgage?

Core Insights - The article discusses the requirements and considerations for refinancing a mortgage, emphasizing the importance of home equity and the type of loan involved [1][3]. Group 1: Home Equity Requirements - Most lenders prefer at least 20% home equity to qualify for refinancing [2]. - The amount of equity needed can vary based on the type of mortgage and the refinancing option chosen, such as rate-and-term or cash-out refinancing [3][8]. - Borrowers with significant equity are viewed as lower risk compared to those with minimal equity [4]. Group 2: Calculating Home Equity and LTV Ratio - Home equity is calculated as the difference between the home's value and the outstanding mortgage balance, including any second mortgages [5]. - The Loan-to-Value (LTV) ratio is the percentage of the loan balance relative to the home's value, with a lower ratio indicating more equity [6]. - For conventional loans, maintaining an LTV ratio of 80% or less is crucial to avoid private mortgage insurance (PMI) [7]. Group 3: Refinancing by Loan Type - Conventional loans may allow refinancing with as little as 5% equity, but PMI will be required if equity is below 20% [8][10]. - FHA loans permit refinancing with a minimum of 3.5% equity for rate-and-term refinancing [10]. - VA and USDA loans have flexible requirements, with some not imposing a minimum equity rule [10][12]. Group 4: Special Refinancing Programs - FHA Streamline Refinance allows borrowers to refinance without a home equity requirement if they are current on payments [14]. - VA Interest Rate Reduction Refinance Loan (IRRRL) does not have a minimum equity requirement [14]. - Programs like Freddie Mac Refi Possible® and Fannie Mae RefiNow may allow refinancing with as little as 3% equity for eligible borrowers [15][18]. Group 5: Alternatives for Low Equity Homeowners - Homeowners with low or negative equity may consider options to build home value, such as making home improvements or paying down the principal more aggressively [20].