Do You Need a Down Payment to Refinance a House?
Updated: Apr 28, 2020
Our country – and our world – is facing a health and economic crisis unlike any we’ve seen in modern times. While medical and science professionals work to defeat the coronavirus, financial experts and fiscal branches of the government are intent on mitigating some of the long-term impact it will have on our economy.
To that end, the Federal Reserve has been cutting interest rates to encourage borrowing and stabilize the lending market. These actions could be very beneficial to those who were considering refinancing their mortgage – before or because of the pandemic. As homeowners evaluate their objectives and choices, many are asking, “do I need a down payment to refinance a house?”
Because your home refinance options differ from purchasing a house, there is typically no money required up front to proceed. As with a regular mortgage, there will be some closing costs, fees, credit check and an evaluation of your home’s loan-to-value ratio (LTV), however the process is more streamlined and what fees there are can be rolled into the new loan.
Home Refinance Options
There are two main types of refinancing programs to consider. A rate and term loan is taken out with the intent to reduce the interest rate (and ultimately the monthly payment) and/or change the term; typically from a 30-year to a 15-year mortgage.
While also taking advantage of reduced interest rates, a cash out refinance draws money from the equity in the home when replacing the mortgage, which may be also be reduced to a 15- or 20-year term if feasible.
The LTV is the financial metric used to determine eligibility, interest rate, and whether mortgage insurance is required, as well as how much of the equity can be tapped for cash. Simply put, the LTV is defined by how much your current mortgage is versus how much your home is worth. If the property is valued at $200,000 and your current loan is $160,000, then the LTV is 80%. There is a common misconception that a minimum of 20% equity is required for a refinance, however much less is required when other factors are considered such as interest rate, credit standing, etc.
Likewise, there is often the belief that it “costs” to refinance when that would be antithetical to the goal of saving money or withdrawing funds from the equity. The equity is already yours which precludes any sort of down payment. Closing costs and fees vary by loan and lender, but they are actually rolled into the new mortgage, so funds are very seldom required up front on a refinance.
The possible exception may be when a debt tied to the original mortgage needs to be resolved before refinancing. Also, some homeowners may choose to pay the closing costs up front to reduce the accumulative interest over the life of the loan, however it’s not usually necessary.
If you’re looking at stabilizing your family’s situation in these uncertain times, we at EnTrust Funding (ETF) encourage you to call us today and discuss the no-money-down options for refinancing your current mortgage. Wishing everyone continued financial and personal health.