When it comes to a refinance, home equity plays an important role. If you have a lot of equity in your home, the decision to refinance may seem like a no-brainer because interest rates are so low. But if you have very little home equity, the answer may not be as evident. Should you go through with a refi if you’re already financing more than 80 percent of your home’s value?
If you owe more than 80 percent of your home’s value, you may not qualify for a mortgage. In such cases, cash-in refinancing, in which you bring money to the closing table, may be an option. However, this means that you will have to come up with cash out of pocket — possibly a difficult feat if you’re refinancing because you’re short on funds.
If you are able to refinance with less than 20 percent equity in your home, you may be required to obtain private mortgage insurance, or PMI. The price difference may not be a big deal if you are already paying PMI on your current mortgage. But if you don’t currently pay PMI, the added cost could sour the deal.
Borrowers with less than 80 percent equity in their home might want to consider a Federal Housing Administration-insured mortgage. But though an FHA loan requires a lower down payment, you will have to pay a monthly mortgage insurance premium, or MIP, as well as an insurance premium at closing time.
And remember, if you’re debating a refinance, home equity isn’t your only consideration. Keep in mind that you will incur closing costs on the new loan, so if you don’t plan to live in the house for more than five years or so, the refi might be cost-prohibitive.
Visit Bankrate’s refinance mortgage calculators for more help determining if you should refinance, home equity considerations and all.