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 mortgage refinance lendersCompare top brands by home loan type, state availability and credit score. Select See rates to provide the lender with basic property and financial details for personalized rates.
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.
Frequently asked questions
More guides on Finder
What happens to my home loan if I die?
Learn about what will happen to your home loan when you die and how to avoid any nasty situations with some pre-planning.
Different types of mortgage loans
A 101 guide covering the types of mortgage loans every homebuyer should know.
How President Biden’s administration can affect mortgage rates
Biden took office on Wednesday, but interest rates didn’t seem to take much note. Here’s the outlook for the year ahead.
Is the low-rate mortgage window closing?
Industry experts predict mortgage rates will move past 3% this year, but that doesn’t mean refinancing is off the table.
Should you refinance your FHA to a conventional loan?
Is it time to refinance your FHA to a conventional loan?
Second Draw PPP loans are now available – here’s how to apply
Some PPP borrowers can get another round of funding through community lenders — though not all can qualify.
How to apply for a Second Draw PPP loan
You only have until May 31, 2021 to get your next application in.
How to get rid of Private Mortgage Insurance (PMI)
Smart strategies that homeowners can use to get rid of Private Mortgage Insurance (PMI).
US mortgage statistics
We take a look at national home loan data & trends and speculate where the mortgage market is heading.
How this family paid off $46K in debt with a cash-out refinance
A refinished basement and rising home prices in their area set them up for success.
Ask an Expert