The SCOOP! Blog by ChangeMyRate.com®

With mortgage rates still stubbornly high, it’s unlikely that you’ll be able to save money with a refinance right now. However, you can prepare for a potential refinance by getting familiar with refinancing home requirements.

Specifically, you can get a good handle on how much value you’ll need to have in your house to refinance your mortgage.

Understanding home equity and LTV

• Home equity: Your home equity is the cash value in your home. For example, if your home is valued at $400,000 and you owe $200,000, your home would have $200,000 of net equity.
• Loan-to-value (LTV) ratio: The LTV ratio is an expression of how much money you’re borrowing compared to the value of your home. It’s an important factor lenders consider when deciding whether to approve you for a refinance. Generally, you want your LTV ratio to be 80 percent or lower. Using the example figures above, your current mortgage would have a 50 percent LTV ratio.

Home equity requirements by loan type

How much equity you need to refinance depends on the type of mortgage refinance that you choose. Here’s how the different kinds compare.

• Conventional refinance: For conventional refinances (including cash-out refinances), you’ll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent). This also helps you avoid private mortgage insurance payments on your new loan. You can use Bankrate’s LTV calculator to find out your ratio.
• FHA refinance: For FHA cash-out refinances, mortgage lenders prefer you to have 20 percent equity remaining after the refi.
• VA refinance: Through a VA cash-out refinance, you can access up to 100 percent of your equity.

Refinances for low- to no-equity mortgages

For those who are underwater on a home loan (in other words, you owe more than the home is worth) or have little to no equity, there were two programs — the Freddie Mac Enhanced Relief Refinance Mortgage and the High LTV Refinance Option from Fannie Mae — designed to help. However, both of those programs have been temporarily suspended.

If you don’t have a high enough LTV ratio to refinance, an alternative for homeowners who may be underwater on their mortgage is paying down the amount owed with a personal loan, says Joseph Polakovic, owner and CEO of Castle West Financial.

“A homeowner could take out a personal loan and pay into their home to a point where they have enough equity to conduct the refinance,” says Polakovic.

After paying down the mortgage and conducting the refinance, the homeowner might consider applying for a home equity line of credit (HELOC) on the home and using the funds to help pay off the personal loan, says Polakovic.

“Ultimately, this would lower their effective borrowing interest rate, as they would have brought down the interest rate and loan amount on their home from the refinance,” says Polakovic.

But this kind of no-equity refi — or even refinancing with equity — only makes sense if you can refinance to a lower interest rate. And with the current high rate environment, now may not be the best time to make this call.

Also, bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit. Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income allowed for a refinance. If you’re unsure about any of this, consult a financial advisor before proceeding.

Understanding home equity and LTV

• Home equity: Your home equity is the cash value in your home. For example, if your home is valued at $400,000 and you owe $200,000, your home would have $200,000 of net equity.
• Loan-to-value (LTV) ratio: The LTV ratio is an expression of how much money you’re borrowing compared to the value of your home. It’s an important factor lenders consider when deciding whether to approve you for a refinance. Generally, you want your LTV ratio to be 80 percent or lower. Using the example figures above, your current mortgage would have a 50 percent LTV ratio.

Home equity requirements by loan type

How much equity you need to refinance depends on the type of mortgage refinance that you choose. Here’s how the different kinds compare.

• Conventional refinance: For conventional refinances (including cash-out refinances), you’ll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent). This also helps you avoid private mortgage insurance payments on your new loan. You can use Bankrate’s LTV calculator to find out your ratio.
• FHA refinance: For FHA cash-out refinances, mortgage lenders prefer you to have 20 percent equity remaining after the refi.
• VA refinance: Through a VA cash-out refinance, you can access up to 100 percent of your equity.

Refinances for low- to no-equity mortgages

For those who are underwater on a home loan (in other words, you owe more than the home is worth) or have little to no equity, there were two programs — the Freddie Mac Enhanced Relief Refinance Mortgage and the High LTV Refinance Option from Fannie Mae — designed to help. However, both of those programs have been temporarily suspended.

If you don’t have a high enough LTV ratio to refinance, an alternative for homeowners who may be underwater on their mortgage is paying down the amount owed with a personal loan, says Joseph Polakovic, owner and CEO of Castle West Financial.

“A homeowner could take out a personal loan and pay into their home to a point where they have enough equity to conduct the refinance,” says Polakovic.

After paying down the mortgage and conducting the refinance, the homeowner might consider applying for a home equity line of credit (HELOC) on the home and using the funds to help pay off the personal loan, says Polakovic.

“Ultimately, this would lower their effective borrowing interest rate, as they would have brought down the interest rate and loan amount on their home from the refinance,” says Polakovic.

But this kind of no-equity refi — or even refinancing with equity — only makes sense if you can refinance to a lower interest rate. And with the current high rate environment, now may not be the best time to make this call.

Also, bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit. Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income allowed for a refinance. If you’re unsure about any of this, consult a financial advisor before proceeding.

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