How Much Equity Do I Need to Refinance?
If you’re thinking of refinancing, it’s important to understand how much equity you have in your home.
Calculating your equity
Equity is the difference between the market value of your property (how much you could sell it for) and how much you owe on your mortgage. For instance, if your home is worth $250,000 and your mortgage balance is $150,000, you have $100,000 in equity, or 40 percent of the property’s value.
Most lenders require some equity in order to refinance
How much depends on the lender and your needs.
- Rate and term refinance
If you just want to change the terms on your existing balance – switch from an adjustable-rate mortgage to a fixed-rate, for instance, or go from a 30-year term to a 40-year – you’ll need at least 5 to 10 percent equity. (There are mortgages available for 100% of a property’s value, but they are expensive and increasingly hard to get.)
- Cash-out refinance
If you want to convert some of your home’s equity into cash through a refinance, you’ll need greater than 10 percent equity. That’s so that your new mortgage doesn’t exceed 90 to 95 percent of your home’s value (known as loan-to-value), and you still have some equity to convert to cash.
So, in our example above, you have 40 percent equity in your home ($100,000 divided by $250,000). Let’s say your lender will only approve your refinance loan with an 80 percent loan-to-value (you maintain 20 percent in equity): that leaves you with 20 percent of your home’s value ($50,000) to convert to cash through a cash-out refinance.
Your equity has everything to do with market conditions in your area. So, like interest rates, your equity can vary. Most lenders will require an independent appraisal of your home when you apply for a refinance mortgage to verify the property’s value.
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