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How much home equity do you need to refinance your mortgage?

You may want to refinance your mortgage to get a better mortgage rate, lock in a lower monthly payment, or receive cash in exchange for equity. But before you start filling out applications, you need to know whether you can refinance right now. To qualify for a mortgage refinance, you need to have a certain amount of equity in your home first.

Most mortgage refinance lenders prefer that you have at least 20% home equity to refinance your current mortgage.

However, multiple variables impact the amount of equity you need, including the type of mortgage loan you are refinancing and the kind of refinance you want to pursue. For example, the rules differ for refinancing a conventional versus an FHA loan. They also depend on whether you’re doing a rate-and-term or cash-out refinance. In some cases, you can refinance regardless of how much equity you have.

Generally, lenders evaluate the risk of any mortgage refinance based on the borrower’s financial profile and home value. Borrowers with significant equity in their home are typically considered a lower risk than those refinancing with little home equity.

Your home equity is the difference between your home value and the amount you owe on your mortgage. If you have a second mortgage, such as a home equity loan or line of credit (HELOC), you’ll need to include that in the calculation.

For example, let’s say your home is worth $400,000. The outstanding balance on your first mortgage is $200,000, and you have a home equity loan with a balance of $50,000.

Add your two mortgage balances: $200,000 + $50,000 = $250,000.

Subtract the total outstanding balance from your home’s value: $400,000 - $250,000 = $150,000

You have $150,000 in home equity, or 37.5% of your home value.

In addition to discussing your home equity, lenders often use the term “loan-to-value ratio.” Your LTV ratio is another way to express the relationship between how much you owe on a property and its value. In the example above, the LTV ratio is 62.5% — in other words, your loan balance equals 62.5% of your home value.

Your LTV ratio and home equity are inversely related. The former expresses how much you owe on your home, and the latter shows how much of your home you technically own.

The LTV ratio is especially important with conventional loans, which require an LTV ratio of 80% or less to avoid private mortgage insurance (PMI). Lenders require borrowers to pay PMI when they make a down payment of less than 20% on a conventional loan.

If you refinance into a conventional loan, you’d ideally have at least 20% equity in your house so you can stop paying PMI.

Although individual lenders can set their own requirements for mortgage refinancing, the amount of home equity you need to refinance generally depends on the mortgage program you choose. The rules vary depending on which type of loan you have and whether you want to do a rate-and-term or cash-out refinance.

Conventional loans. Some lenders allow you to refinance a conventional loan with as little as 5% in home equity. However, if you refinance with less than 20% equity, you will need to pay for PMI.
FHA loans. You can refinance an FHA loan with as little as 3.5% equity for a standard refinance. A cash-out refinance will require at least 20% equity.
VA loans. The rate-and-term VA loan refinance, also known as an Interest Rate Reduction Refinance Loan (IRRRL), doesn’t have a minimum equity requirement. However, you’ll probably need at least 10% in home equity for a VA cash-out refinance.
USDA loans. You can usually refinance a USDA loan with little to no home equity. USDA loans don’t allow for cash-out refinancing, though, unless you’re refinancing from a USDA loan into a conventional one. Then you’ll need 20% equity.

Equity requirements for rate-and-term refinancing

“Rate-and-term refinancing” refers to swapping out your original mortgage for a new one with a different interest rate and term length, such as 30 or 15 years.. Your monthly payments will change and be based on your new balance, mortgage rate, and loan term.

Typically, a rate-and-term refinance is considered less risky than cash-out refinancing since the former does not increase your loan balance by taking out any of your home equity.

While conventional loan mortgage lenders prefer that you have at least 20% in home equity, some may offer a rate-and-term refinance with as little as 5% in home equity. FHA loans allow borrowers to have as little as 3.5% in home equity for a rate-and-term refinance.

VA and USDA loan lenders may set their own requirements for a rate-and-term refinance, but the government entities do not have a minimum home equity rule.

Learn more: How soon can you refinance your mortgage after buying a home?

A cash-out refinance allows you to take out some of your home equity in cash and use the money for any purpose, such as home improvements, debt consolidation, or college tuition. By borrowing against your home equity, your new loan balance will be larger than your current mortgage balance.

Most cash-out refinance lenders require at least 20% in home equity for FHA and conventional mortgage loans. The rule for VA loans may vary by lender, but most want at least 10% equity in your home. USDA loans do not have a cash-out refinance option.

You may find that you have a low amount of home equity (such as 1% or 2%), no equity, or even negative equity, which occurs when you owe more than your home is worth.

Depending on your financial circumstances, you may qualify for a special refinancing program. Here are some options:

FHA Streamline Refinance. This program allows FHA borrowers to take out a rate-and-term refinance while skipping steps such as the home appraisal as long as they are current on their payments. In many cases, FHA Streamline Refinance loans don’t have a home equity requirement.
VA Interest Rate Reduction Refinance Loan (IRRRL). This is a type of streamline refinance for VA loan borrowers, and you may qualify regardless of your home equity situation.
USDA streamlined assist refinance. If you have a USDA guaranteed or direct loan, you may qualify for a refinance without an appraisal if you have made 12 consecutive payments and you can lower your monthly payment by at least $50.
Freddie Mac Refi Possible® or Fannie Mae RefiNow programs. With a conventional loan, you may be able to refinance with as little as 3% equity with one of these programs. To qualify, you must meet income eligibility limits for low-to-moderate income borrowers and earn up to 100% of the area median income for your household size.

Two other programs, the Fannie Mae High LTV Refinance Option and the Freddie Mac Enhanced Relief Refinance, were available in the past to borrowers with low equity, but both are currently suspended.

Maybe you don’t qualify for any refinancing programs because you lack the home equity. If so, here are some possible ways to build value in your home:

Pay down your principal more aggressively, either with a lump sum or incremental payments.
Make home improvements that add value to your home.
Rent out part or all of the property to generate income while you pay down the loan balance.
Wait to return to positive equity as the housing market shifts and you pay down your mortgage over time.

The “80/20 rule” refers to the typical requirement for conventional refinancing: Borrowers need a maximum 80% loan-to-value ratio and 20% in home equity. The rule does not apply to FHA, VA, or USDA loans, though. Also, some mortgage lenders have different requirements for borrowers based on individual financial circumstances.

In most cases, you need an appraisal for a mortgage refinance. The lender wants to be certain that the property has enough equity for the new loan, which depends on its current market value. However, streamlined refinancing through the FHA, VA, or USDA typically does not require an appraisal. It’s up to the lender to decide whether an appraisal is required, so sometimes you may be eligible for an appraisal waiver.

Depending on your loan type and your financial circumstances, you may be able to refinance with as little as 5% in home equity. If you have an FHA, VA, or USDA mortgage, you could qualify for a streamlined refinance regardless of how much equity you have in your home. If your finances are in strong shape, you may be eligible to refinance your conventional loan with just 5% down too. If you meet income eligibility criteria and earn up to 100% of the area median income for your household size, you may qualify to refinance your conventional mortgage with the Fannie Mae RefiNow or Freddie Mac Refi Possible® program.