Refinance if home equity is low

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Don’t despair — it still may be possible to refinance even if home equity is in short supply. It may not be easy, but the federal government offers alternatives for borrowers underwater on their mortgages.

Millions of Americans across the country owe more on their home loans than the mortgage is worth, thanks to plunging property values in the wake of the housing bust. While today’s low mortgage rates are extremely appealing, many homeowners fear they can’t take advantage of them because they lack home equity.

But with government efforts such as the Home Affordable Refinance Program, or HARP, some homeowners can refinance even if the appraised value of their home is low. For more information, check out the federal government’s Making Home Affordable website.

The HARP program is designed to assist those who have an interest-only mortgage, those whose low introductory rate mortgage will increase in the future or those who face a balloon payment. By refinancing, homeowners get a fixed-rate loan that helps them avoid future payment increases.

More paperwork

Homeowners who still have a good chunk of home equity should find it easier to get a refinance.

However, even these borrowers will be required to provide more income documentation today than was the case several years ago.

Today’s lenders are placing ever-greater scrutiny on the income verification process. Borrowers should expect to provide complete copies of recent tax returns. Other requested paperwork may include bank and investment documents, paycheck stubs and W-2s.

Lenders generally urge borrowers to bring in these documents early, which should help speed up the refinance process. It’s also important to provide every page of a requested document and to avoid altering documents in any way.

Today’s mortgage rates are among the lowest in decades. Whether you have a lot of home equity or a little, a refinance may be waiting for you.