If you have 20% of your home’s value paid off, you’re eligible for the best rates.
If you’re planning to refinance your home, one of the first things you need to do is calculate how much equity you’ve built up. While some lenders will let you refinance with as little as 5%, you’ll likely have to pay higher interest rates and take out private mortgage insurance.
What is equity?
Equity the money you’ve saved in a home, or the difference between your home’s value and what you have left to repay on your loan.
For example, if you live in a home worth $750,000 and you still have to repay $250,000, you have $500,000 in equity. The equation for equity is given below:
Equity = property value – outstanding loan amount
How much equity do I need when refinancing?
Many loans come with a maximum loan-to-value ratio (LVR) of 95%, which means that if you want to refinance you’ll need at least 5% equity in your home — but refinancing with only 5% equity will likely mean high interest rates and a smaller choice of lenders.
If you want to refinance at a competitive rate, you’ll need at least 20% equity in your home. Lenders look at your equity as a means to assess risk. The more equity you have, the lower risk you present to the lender.
What if I don’t have at least 20% in equity?
When you choose to refinance without at least 20% equity in your home, there’s a good chance you’ll have to pay private mortgage insurance (PMI). This type of insurance generally costs between 0.5% and 1% of the home’s value annually, though you can cancel your policy once you’ve built up 20% equity in the home.
If you don’t want to take out PMI, or if you’re having trouble getting approved by a lender, you may need to spend some time paying down your mortgage before reapplying.
Compare refinancing options
Having 20% or more equity built up in your home puts you in the best position to refinance, but some lenders will consider applicants with as little as 5% equity. If you’ve decided that refinancing is the best step for you, compare mortgage lenders to get started.