Do You Have Enough Equity to Refinance?
The financial news of late has included lower interest rates and higher loan limits, and you may be wondering if it’s time to take advantage of those numbers and refinance your current mortgage. The first thing to consider is your home’s equity.
Equity refers to the portion of your home that you actually own, or the amount that you would get back if you sold it today – minus the mortgage amount. In other words, if your home is deemed to be worth $200,000 and your mortgage is $150,000, you have 25% equity.
You can look at comparative home sales in your neighborhood to get a rough idea of your current value, or a lender will arrange a formal appraisal to determine the value, and thus, your home’s equity.
So, how much equity do you need to refinance? That depends.
Lenders will look at your loan-to-value ratio (LTV), which is basically the inverse of your equity. It describes the amount being borrowed compared to the appraised property value. The LTV ratio can determine interest rates.
Equity by the Number
• Conventional: The general rule of thumb for refinancing is a necessary minimum of 20% equity in your home. However, you’re definitely able to qualify with less depending on other factors. If your LTV is higher but your credit rating is good, a lender may qualify you with a higher interest rate or by requiring private mortgage insurance (PMI).
Mortgage insurance protects the lender in case of defaulting on the loan, and is typically required when there is less than 20% equity. If it isn’t a cash-out loan, there are programs where you may be able to pay mortgage insurance and refinance for as much as 95% of the home’s value.
• FHA Refinancing: If you’re working with less than 20% of home equity and a lower credit score, one of the FHA (Federal Housing Administration) programs may be a great fit. Those eligible may put as little as 3.5% down with a federally backed lender. Rates are less flexible, but still competitive, and mortgage insurance would be required.
• VA Loans: The Veterans Administration (VA) makes owning a home and refinancing much easier for our nation’s military members – both past and current. Qualified borrowers can refinance up to 100% of their primary residence’s value. Interest rates will still depend on credit standing, but very few programs allow the flexibility of refinancing through the VA.
Still curious about the value your home and what your options are as rates and limits are changing? At EnTrust Funding (ETF), we’re more than happy to do the math and determine if you have enough equity to refinance and to guide you to the most effective loan for your situation. Give us a call today to arrange a conversation.