Refinance loans happen years after the home purchase. They exist to help homeowners like you reduce your monthly costs, shorten the length of your mortgage, tap into cash for important life events, and fund home repairs and improvements. Most refinance loans are shaped by the equity you’ve built in your home – but some require no home equity at all! Let’s take a look at how home equity effects what’s possible in a refinance.
Home equity starts with an appraisal.
The size of your home equity often determines what your refinance loan looks like. Your equity directly impacts how low the new monthly payment can be or determine how much cash you can take out of your home. To determine just how much home equity you really have, you need an appraisal on your home.
Why an appraisal? Because home equity is the appraised value of your home minus the balance remaining on your mortgage. Let’s say your home’s current appraisal is $250,000 and you have $200,000 left to pay on your mortgage. Take the appraised value, subtract the mortgage balance, and the remainder is your home equity. In this example, that would be $50,000.
Notice that the appraised value may change after you purchase your home. If the real estate market has been strong, your home may appraise for significantly more than what you bought it for. All that extra value is additional equity you have in your home. On the other hand, if the market has been weak, your home may appraise for less than you bought it for. In that case, you would have less equity. In the worst cases, you might be “underwater,” which means your home’s appraised value is less than what you owe. But even in those painful situations, a refinance may still be possible.
Home equity makes a difference.
The most standard refinance is with a conventional loan. For these loans, if your equity has reached 20% of the appraised value, you may not be required to carry private mortgage insurance (PMI). If that’s your situation, then you’ve just lowered your monthly expense even more.
There are two other ways home equity impacts your refinance. The more equity you have, the lower your interest rate. The more equity you have, the more money you can take in a cash-out refinance loan. With those loans, your cash-out is directly limited by how much equity you have in your home. The cash amount often cannot exceed 80% or 90% of your home equity.
You may still refinance with little to no home equity.
Fannie Mae and Freddie Mac offer loans for people with minimal home equity. If you qualify, you may be able to secure refinancing with as little as 3% equity. The Veterans Administration also offers refinancing with a VA loan, which requires zero home equity.
There are other factors that will impact your ability to refinance, and these vary by the type of loan and by the lender involved. Your credit score is almost always a consideration. Plus, lenders may look at the percentage of your pre-tax income that goes to paying off debt including mortgage loans, personal loans, credit cards, etc.
Find the loan that works for you.
It always makes sense to have me review your situation as I have a deep knowledge of our constantly evolving market and experience with thousands of homeowners like you. I can bring you all the options you qualify for, present the pros and cons, and guide you every step of the way. I will ensure to make it simpler, clearer, and easier to navigate. Let me help you get the greatest benefits possible from refinancing your home!