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How much home equity do I need for a mortgage refinance?

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With mortgage rates on the rise, the opportunity to save money with a refinance is shrinking, but it can still make sense for some homeowners. When it comes to refinancing a mortgage, though, home equity matters.

How much home equity do I need to refinance my mortgage?

Home equity is the cash value in your home. For instance, if your home is valued at $300,000 and you owe $200,000, your home would have $100,000 of cash value, or equity. If you don’t have enough home equity, private mortgage insurance, or PMI, may be required. This is a type of insurance borrowers pay to protect the lender in the event the borrower defaults on the loan.

Conventional refinance

For conventional refinances, you’ll need at least 20 percent equity in your home to avoid PMI. This also means you need a loan-to-value (LTV) ratio of no more than 80 percent. You can use Bankrate’s LTV calculator to find out your ratio.

FHA and VA refinances

For FHA cash-out refinances, mortgage lenders prefer borrowers have 20 percent equity remaining after the refi. Through a VA cash-out refinance, you can access up to 100 percent of your equity.

Refinances for low- to no-equity mortgages

For those who are underwater on a home loan (in other words, you owe more than the home is worth) or have little to no equity, there were two programs, the Freddie Mac Enhanced Relief Refinance Mortgage and the High LTV Refinance Option from Fannie Mae, designed to help. Both of those programs have been temporarily suspended.

An alternative for homeowners who may be underwater on their mortgage is paying down the amount owed with a personal loan, says Joseph Polakovic, owner of Castle West Financial.

“A homeowner could take out a personal loan and pay into their home to a point where they have enough equity to conduct the refinance,” explains Polakovic.

After paying down the mortgage and conducting the refinance, the homeowner might consider applying for a home equity line of credit (HELOC) on the home and using the funds to help pay off the personal loan, suggests Polakovic.

“Ultimately, this would lower their effective borrowing interest rate, as they would have brought down the interest rate and loan amount on their home from the refinance,” says Polakovic.

Bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit, and some lenders have ceased HELOC applications temporarily. Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income allowed for a refinance. If you’re unsure about any of this, consult a financial advisor before proceeding.

Written by
Mia Taylor
Former Contributing Writer
Mia Taylor is a former contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
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