If you are in the market to refinance, you probably wonder how much equity you need. Many people assume that they have to have a low LTV to do so. That’s a myth, though. Unless you plan to take cash out of your home’s equity, your LTV requirements are the same as they were for your purchase. Unless things have changed drastically, you probably have a lower LTV now than you did when you bought the home.
What is Your Equity?
You can figure out how much equity you have in your home after having two numbers – the current value of your home and the outstanding balance of your mortgage. Take the two numbers in the following calculation:
Home’s current value – Outstanding balance on your mortgage = Equity in your home
You’ll have more equity in your home if you put money down on it. The higher the down payment, the larger your investment in the home will be.
The Program Matters
When it comes to refinancing, the loan program you choose will determine how much equity you need. The following LTVs pertain to each program:
- Conventional loans – At a minimum, you need 5% equity for a conventional refinance. If you want to avoid PMI, though, you’ll need 20% equity. Keep in mind, though, if you do borrow more than 80% of the home’s value, you can have the PMI removed once you have an LTV lower than 80%.
- FHA loans – If you are refinancing a current FHA loan into another FHA loan, you only need 3.5% equity in the home. If you want to take cash out of the home’s equity, you can borrow up to an 85% LTV.
- VA loans – The VA has flexible guidelines that allow you to refinance your loan with no equity. You can even tap into a home’s equity, if you have some, and take out up to 100% of the home’s value in a cash-out refinance.
A New Appraisal
Your equity during a refinance is determined by the latest value for your home. This time around, you’ll have to pay for another appraisal. The only exception to the rule is if you use the FHA streamline or VA streamline refinance option. Both of these loans don’t require a new appraisal.
The new appraisal will let a lender know today’s value for your home. Since the housing crisis is behind us and many homes have regained value, the hope is that you have more equity in your home now than you did when you first bought it. You have the combination of the home appreciating and the principal balance that you paid down with every mortgage payment you made.
When Should you Refinance?
It’s a good idea to have a decent amount of equity in your home before you refinance, especially if you are going to start the term all over again. Let’s say, for example, that you took out a 30-year loan originally. If you refinance in say 4 years, and you take another 30-year term, you lose the last 4 years that you paid on the mortgage. If you restart with close to the same loan amount that you started with, you could end up costing yourself more money in interest than is necessary. Waiting until you have equity in the home can help you secure a lower interest rate and possibly a lower monthly payment.
The amount of equity you need to refinance depends on your situation. In general, the lower your LTV the better terms and rate you can get for a mortgage. This can help you gain the most benefits from refinancing your loan.Click to See the Latest Mortgage Rates»