Refinancing your home loan could help you lower your interest rate and monthly payments. Lenders look at many factors, including the amount of equity an applicant has, to decide whether to approve a refinance and what terms to offer.
Conventional Mortgage Refinance
Conventional lenders set their own requirements when it comes to the amount of equity needed to refinance a mortgage. It’s generally easier to qualify for a mortgage refinance if you have at least 20 percent equity, but some lenders will approve an application from a homeowner with less equity and charge higher fees and interest rates.
If you have less than 20 percent equity, you’ll most likely need to have private mortgage insurance, which may cost hundreds of dollars per month. Sometimes a lender will waive the PMI requirement if a borrower has less than 20 percent equity but has a track record of consistently paying bills on time.
If your house has declined in value since you bought it and you have less than 20 percent equity, you will have to pay for private mortgage insurance, unless your lender waives it. If you didn’t have to purchase PMI initially but you would have to after refinancing, you might not save much money overall.
FHA Refinancing Options
The Federal Housing Administration has less stringent requirements than conventional lenders. It can approve a refinance even if you owe more than your home is worth. With a streamlined refinance, you can’t get more than $500 cash at closing or add closing costs to the amount of the loan. Your mortgage insurance must be extended to the new loan. For other, non-streamlined FHA refinances, you can refinance up to 85 percent of your home’s value. When refinancing through the FHA, you will always have to purchase mortgage insurance.
VA Mortgage Refinancing Program
The Department of Veterans Affairs has a streamlined refinancing process called the VA Interest Rate Reduction Refinance Loan that can be used to refinance an existing VA loan. IRRRL doesn’t require an appraisal, credit underwriting or mortgage insurance, and any VA lender can process an application.
The VA limits the amount of liability it will assume for a loan. If you have high equity, good credit and money for a down payment, you may qualify for a higher loan amount and a lower interest rate. You may be able to include closing costs in the amount of the new loan, but cash back at closing is not an option.
Should You Refinance Your Mortgage?
The amount of equity you have will affect your ability to qualify for a loan and the terms that will come along with it. Discuss your options with several lenders so you can make an informed decision.