How much equity do you need to refinance your mortgage?
Take time to run the numbers before you begin applying for a home refinance. (iStock)
As states continue to make tough decisions about reopening the economy, many homeowners are considering taking advantage of lower interest rates with a mortgage refinance. Mortgage rates hit another historic low with 30-year fixed-rate loans averaging 2.98 percent and 15-year fixed-rate loans averaging 2.48 percent, according to Freddie Mac.
Interest rates have been on a steady decline since the Federal Reserve made emergency rate cuts in March in response to the coronavirus pandemic.
Since interest rates are so low, now may be a good time for you to consider refinancing your home or tapping into the equity on your home for a loan. Consider using an online tool, like Credible, to look at all your refinance options, and to compare rates and lender fees.
How much equity do I need for a mortgage refinance?
When lenders refer to equity in a property, they mean the difference between what the home is worth and what you owe on your loan. For example, if your property is worth $400,000 and you owe $200,000 on a mortgage loan, you have 50 percent equity.
Many homeowners consider refinancing their mortgage if they purchased the home without a 20 percent down payment. If you have less than 20 percent equity in a property, your lender may require that you pay for private mortgage insurance (PMI). Once you have at least 20 percent equity, you may be able to refinance your loan to remove that PMI fee.
While many lenders want to see at least 20 percent equity before they consider refinancing a home loan, you may be able to take advantage of the lower rates with a refinance, if you have an excellent credit score. Use Credible to see what kind of rates are currently available to you.
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How do I know how much equity I have in my property?
The easiest way to determine how much equity you have in your property is to subtract the amount you owe on your loan from how much your home is worth. You can get a rough estimate of your property value by seeing how much similar homes in your neighborhood fetched on the market. Alternatively, you could pay for an appraisal, which could set you back as much as $450.
When you’re figuring out how much equity you have in your home, don’t forget to consider your LTV (loan-to-value) ratio. To determine your LTV, divide your loan balance by the current value of your home.
Using the example of a $400,000 property, assume you owe $150,000. Your LTV would be 37.5 percent. If you take out a $100,000 home equity loan, your new LTV would be 62.5 percent (and your equity drops to 38.5 percent).
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Is refinancing my mortgage right for me?
Even with low-interest rates, refinancing your mortgage may not be the right choice for you. If you plan to move within the next five years or the costs of refinancing your home loan exceed the amount you would save, refinancing isn’t worth the time and money.
Remember, when you refinance your mortgage loan, you’ll be receiving a new loan. Taking out a new loan means that you’ll need to qualify. Your credit score should be in order, and you should be comfortable paying closing fees and other costs associated with your loan. These costs could run between $1,500 and $5,000, according to Trulia.
Refinancing your home could save you thousands of dollars and reduce your monthly payment. You’ll get the most significant benefits if you find a reliable lender with the best rates, and avoid common setbacks like accepting the first offer, forgetting to run the numbers, or allowing your home to go into forbearance before applying for a mortgage refinance.
If you’re going to spend the time and money to refinance your home loan, make sure to take the time to compare multiple offers from different lenders. A difference of even 1 percent can make a big difference over the life of your loan. Use a tool like Credible to see rates from multiple lenders.
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