How Much Equity Do You Need to Refinance?
How Much Equity Do You Need to Refinance?
Refinancing your mortgage can be a smart way to lower your monthly payments, shorten your loan term, or tap into your home’s value. But before you can take advantage of today’s rates, one critical factor comes into play: your home equity. So, how much equity do you actually need to refinance? Let’s break it down.
What Is Home Equity?
Home equity is the portion of your home that you truly “own.” It’s the difference between your home’s market value and the amount you still owe on your mortgage. For example, if your home is worth $300,000 and you owe $200,000, you have $100,000 in equity — about 33%.
Equity grows over time as you pay down your mortgage and as property values rise.
Minimum Equity Requirements for Refinancing
The amount of equity you need depends on the type of refinancing you’re considering:
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Traditional refinance: Most lenders require you to have at least 20% equity in your home. That means your loan-to-value ratio (LTV) — the loan amount compared to the home’s value — should be 80% or lower.
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Cash-out refinance: If you’re looking to take cash out of your home’s equity, you’ll typically need at least 20% equity remaining in the property after the refinance. For example, you might only be allowed to borrow up to 80% of your home’s value.
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FHA Streamline refinance: If you have an FHA loan, you might not need much equity — or any at all — to qualify for an FHA Streamline Refinance. However, you can’t take cash out with this option.
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VA refinance (IRRRL): Veterans with VA loans can also refinance with little or no equity using a VA Interest Rate Reduction Refinance Loan (IRRRL).
Special Programs for Low Equity
If you don’t have 20% equity, you may still have options:
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FHA loans allow for refinancing with as little as 2%-5% equity.
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VA and USDA loans can sometimes refinance with 0% equity.
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Some lenders offer conventional refinance programs for homeowners with an LTV as high as 97%.
Keep in mind that refinancing with less than 20% equity might mean you’ll have to pay private mortgage insurance (PMI), which can add to your monthly costs.
Why Equity Matters
Lenders view borrowers with more equity as less risky. The more equity you have, the better your chances of:
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Qualifying for refinancing
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Securing a lower interest rate
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Avoiding PMI
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Having flexibility in loan terms
If your equity is low, refinancing can still make sense, but you’ll need to carefully weigh the costs and benefits.
How to Build More Equity Before Refinancing
If you don’t have enough equity yet, you have options to speed things up:
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Make extra principal payments on your mortgage.
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Increase your home’s value through renovations or improvements.
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Wait for property values to rise in your area.
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Reassess your home’s value — sometimes a new appraisal can show you have more equity than you think.
Final Thoughts
The general rule of thumb is that you’ll want at least 20% home equity to refinance without paying extra fees like PMI — especially if you’re seeking a cash-out refinance. However, government-backed programs offer flexibility for homeowners with lower equity.
Before moving forward, talk to a mortgage lender who can evaluate your specific situation. They can help you understand your options and decide whether refinancing now makes financial sense — or whether it’s worth waiting until you’ve built up a bit more equity.