Fact-checked by Peter Warden.
Refinancing your mortgage can lower your payments and free up space in your monthly budget. But if you don’t have enough equity in your home, you won’t be able to qualify for a refinance loan.
How much equity do you need to refinance, and does it matter what type of loan you have?
The least you need to know:
- Conventional loans typically require 3% to 5% equity to refinance, while government-backed loans like FHA and VA may allow refinancing with zero or minimal equity.
- To qualify for a cash-out refinance, most lenders require at least 20% equity in your home to remain after you withdraw cash.
- Home appreciation can act as free equity. So, if you’re a year or more into your mortgage, you may have more equity than you realize.
| Refinance Program | Existing Loan Type | Minimum Equity to Refinance |
| Conventional | Conventional | 3% to 5% |
| Conventional | Other | Typically 5% to 20% (depends on the lender and PMI requirements) |
| FHA | FHA | Zero/negative equity OK |
| FHA | Other | 2.25% |
| VA | VA | Zero/negative equity OK |
| VA | Other | 0-10% depending on lender |
| USDA | USDA | Zero/negative equity OK |
| USDA | Other | Ineligible: only USDA loans can be refinanced using USDA |
A Quick Refresher on Loan-to-Value Ratio
A refinance loan is essentially a new mortgage that replaces your old one. So, many refinance requirements are the same as when you initially took out the loan. One of those requirements that comes into play with equity and refinancing is the loan-to-value (LTV) ratio. Let’s break down LTV as it pertains to refinances:
The LTV is the percentage of the home’s value that you’re able to get a loan for and can be calculated using the mortgage balance divided by home value.
For example, if you put 10% down on a $300,000 house, you need a mortgage lender to finance the remaining 90%, which is $270,000. Thus, your LTV would be 90% ($270K / $300K = 0.9).
So, if you have 15% equity in your home when it comes time to refinance, your LTV would be 85%. This makes you eligible for most refinance programs. Though, keep in mind that this can vary by lender.
How Much Equity Do You Need to Refinance a Conventional Loan?
It’s possible to refinance a conventional loan with as little as 3% equity. This means that with a home worth $300,000, you could refinance a mortgage that’s as much as $291,000.
To qualify for a conventional 97% LTV refi, your existing mortgage must be owned or securitized by Fannie Mae or Freddie Mac. Homeowners ineligible for 97% financing can still qualify for a conventional refinance with just 5% equity.
With a $300,000 home, a 95% LTV refinance would allow for a loan balance of up to $285,000.
Refinancing With Private Mortgage Insurance
Conventional guidelines require all borrowers with less than 20% equity in their homes to pay for private mortgage insurance (PMI). PMI rates vary based on your credit score and your home’s equity. For borrowers with lower credit and little equity, the premium could add substantially to their payment.
For example, insurance provider MGIC would charge a borrower with 10% equity and a credit score of 740 an annual rate of 0.38% on their 30-year loan balance. For a $300,000 mortgage, this could total around $95 per month.
However, a borrower with just 3% equity and a score of 640 would pay a private mortgage insurance rate of 1.65%. On a $300,000 loan, this could equal around $400 per month.
Keep in mind that PMI rates vary by provider and are influenced by individual credit and equity factors.
If you have little equity in your home, waiting until you reach the 20% mark to refinance probably doesn’t make sense. But if you can improve your credit score, it may make sense to hold off on your refi to do so.
Another option, if you have the funds available, is to do a cash-in refinance. This is when you contribute additional cash at closing to lower your loan balance and increase your equity. Cash-in refis are commonly done to eliminate PMI for borrowers nearing 20% equity.
Equity Requirements for Government-Backed Refinance Options
Conventional loans are the most popular type of residential mortgage, but there are other options out there. Common alternatives include refinances secured by the FHA, VA, and USDA.
These government-backed refinance options all have lower equity requirements and may even allow you to refinance regardless of your home’s value or current mortgage balance.
| Loan Program | Existing Loan Type | Minimum Equity to Refinance |
| FHA | FHA | Zero/negative equity OK |
| FHA | Other | 2.25% |
| VA | VA | Zero/negative equity OK |
| VA | Other | 0-10% depending on lender |
| USDA | USDA | Zero/negative equity OK |
| USDA | Other | Ineligible: only USDA loans can be refinanced using USDA. |
*Current FHA borrowers may be eligible for an FHA streamline refinance with no minimum equity requirement
FHA Refinances
The Federal Housing Administration offers six kinds of refinances, with their rate-and-term refi open to homeowners with any type of existing loan. With an FHA rate-and-term refinance, you can borrow up to 97.75% of your home’s value (meaning you have 2.25% equity).
On a property worth $300,000, you could get a standard FHA refi for up to $293,250: $2,250 more than a conventional loan. In many low-equity situations, this could mean the difference between qualifying and not.
Current FHA borrowers may also be eligible for the low-doc FHA streamline refinance program, which lets them reduce their monthly payment and interest rate without obtaining an appraisal. This means that you can potentially refinance with no equity or even if you owe more than the home is worth.
VA Refinances
Homeowners typically need to be either active-duty service members or honorably discharged veterans to qualify for a VA refinance. However, eligible borrowers might be able to refinance no matter how little built-up equity they have.
The VA also offers a streamlined refinance option (the IRRRL) for current loan holders. Plus, eligible borrowers with other types of mortgages might be able to refinance through a VA lender for up to their home’s total appraised value, aka 100% LTV or 0% equity. This is done through a VA cash-out refinance.
USDA Refinances
USDA refi loans let you refinance your full mortgage balance, regardless of your built-up equity. There are even a couple of streamline programs – the most popular being the USDA Streamlined-Assist – that are straightforward and require minimal paperwork to process the loan.
The downside of the USDA is that it does not allow borrowers with other types of mortgages to refinance into its program. You must currently have a USDA loan to qualify.
Closing Costs May Increase the Equity You Need to Refinance
Refinancing your home loan means paying for closing costs much the same as when you initially took out your mortgage. Conventional closing costs generally run from 2% to 4% of your loan balance. Other programs may have additional expenses due at closing, such as the FHA upfront mortgage insurance premium or the VA funding fee.
For example, if you’re doing a conventional refinance on a $250,000 mortgage, you could likely anticipate closing costs ranging from $5,000 to $10,000.
Luckily, it may be possible to go through with your refi even if you don’t have the extra cash to pay upfront. This most commonly involves rolling your closing costs into your loan balance. However, doing so requires you to have additional built-up equity.
Assuming estimated closing costs of $7,500 (3%) on our $250,000 refinance example, rolling that amount into the loan for a total balance of $257,500 would require the property to be worth at least $265,000. This would equate to a current equity requirement of just over 6%.
Lender-Paid Closing Costs
One alternative for homeowners without the cash to pay for closing costs and insufficient equity to wrap them into the refinance is to ask their lender to pay for some or all of the expenses.
Mortgage providers accomplish this by offering lender credits, which are essentially the opposite of mortgage discount points. This credit helps you cover your loan’s closing costs with little to no out-of-pocket contribution. In exchange, you’ll agree to a slightly higher interest rate on your loan.
While you might not be able to get the best possible deal with lender-paid closing costs, it can still be a win-win situation if you’re able to reduce your rate and drop your monthly payments.
Don’t Forget About Home Appreciation
Just because your home was worth $300,000 when you took out the mortgage, doesn’t mean it’s still worth that. Luckily for homeowners, homes in the United States appreciate, on average, between 3% and 5% annually (though this varies depending on location and market conditions). That appreciation equates to free equity for you, the homeowner.
So, if it’s been a year or more since you took out the mortgage, you may have more equity than you realize.
Let’s take the $300,000 home we’ve been using as an example. If you’re two years into the mortgage and that home has appreciated 3.5% every year, that home could be worth over $321,000. That’s $21,000 of equity you suddenly have in your home that you didn’t pay for. That’s around 6.5% of the home’s value in free equity just from appreciation – not including what you’ve gained through your down payment and the principal you pay down every month.
Unless you’re doing a government-backed streamline refinance, you’ll need a home appraisal to determine your home’s value at the time of refinancing. This is when you’ll learn how much your home has appreciated.
It’s important to note that homes don’t always appreciate and that the 3-4% is based on long-term trends. So, having a mortgage for two years doesn’t mean you’ll necessarily gain that much in appreciation.
Can I Refinance If I’m Underwater on My Mortgage?
Three government programs allow underwater refinances:
- FHA Streamline
- VA Streamline
- USDA Streamlined-Assist
In all cases, your current loan must be the same loan type as the refinance, for instance, FHA to FHA. No appraisal is required for these programs, eliminating the equity requirement altogether.
There were previously two conventional refi programs that would allow you to refinance your mortgage, even if you were underwater and owed more than the property was worth:
- Fannie Mae High LTV Refinance Option (HIRO)
- Freddie Mac Enhanced Relief Refinance Mortgages (FMERR)
Unfortunately, both programs were paused, as rising home prices before and during the pandemic drastically reduced the demand for high-LTV refis.
There are currently no conventional refinance options for borrowers with underwater mortgages. With current program guidelines, you must have at least 3% equity to qualify for a conventional refinance.
However, if property values stagnate or decline and a greater number of borrowers need assistance, it’s possible that these programs could be renewed or alternative high-LTV refi mortgages implemented.
How Much Equity Do You Need for a Cash-Out Refinance?
So far, we’ve only been discussing the standard rate-and-term refinance, which allows you to reduce your interest rate and adjust the term of your loan.
However, homeowners with a higher equity level may wonder how much they need to do a cash-out refinance. The figure will usually be far higher than the rate-and-term equity requirements.
Both conventional and FHA lenders require a minimum of 20% equity left over after you withdraw the cash you need. The USDA does not presently offer a cash-out refi option.
VA Cash-Out Refinances
However, borrowers eligible for a VA cash-out refinance may be able to withdraw more with less equity. Current VA guidelines allow lenders to approve cash-outs for up to 100% of a property’s appraised value, although some lenders set their maximum LTV at 90%.
In certain instances, it may be possible for eligible VA applicants with low equity to take out cash and still refinance when other lenders would deny them a simple rate-and-term refi.
Advantages of Refinancing With Little or No Equity
Refinancing, even with little or no equity, can help you reduce your expenses and provide extra padding for your monthly budget. Some of the most significant advantages of refinancing include the ability to:
- Lower your interest rate
- Extend the term of your loan
- Switch from a fixed to an adjustable rate or vice versa
- Remove a co-borrower or co-signer from your mortgage
Disadvantages of Refinancing With Little or No Equity
However, refinancing with little or no equity can provide more challenges and have other disadvantages compared to a higher-equity refi:
- Closing costs usually require cash-on-hand or additional equity
- It could take years to recoup the refinance closing costs
- You’ll likely be making mortgage payments for longer
- Lifetime interest costs may grow even with a lower rate
Low Equity Refinance Alternatives
Are you having trouble qualifying for a refinance because you don’t have enough equity in your home? Here are a few low-equity refinance alternatives to consider.
Cash-In Refinance
If you are just under the amount of equity you need, you might want to consider a cash-in refinance. As we mentioned before, this is when you contribute cash at closing to lower your loan balance and increase your equity.
While it may seem counterproductive to spend extra cash to refinance and lower your payments, you’re not actually losing the money you contribute. Instead, the sum is converted into equity, which you can tap in the future as the need arises.
Streamline Refinances
All three government-backed mortgage programs offer borrowers low-doc streamline refinances. In most situations, these loans do not require you to go through an in-depth credit check, verify your income, or obtain a home appraisal.
Since your refi is based on the value of your home when you originally took out your loan, you can still complete a streamline refinance even if local property prices have dropped and you’re underwater on your mortgage.
The downside to streamline refis is that they’re limited to current program borrowers. Conventional loan holders cannot use a government-backed streamline refinance, and there are currently no low-doc conventional alternatives.
Reduce Expenses Elsewhere
If you don’t have enough equity to refinance, can’t contribute cash at closing, and aren’t eligible for a streamline refi, your options may be limited. In many cases, the best path forward is to reduce expenses elsewhere in your budget while continuing to pay down your loan until you reach the required equity.
When you’re able to, making additional principal payments on your loan – even for small amounts – can help you reduce your debt and grow your equity sooner.
Refinance Your Home With Little or No Equity
Conventional refinances are available for most borrowers with between 3% and 5% equity, while FHA refi loans require just 2.25%. Plus, you may qualify for a streamlined refinance regardless of your established equity if you currently have a government-backed mortgage. To discover options and get an accurate idea of how much you can borrow against your home, check out the current refinance rates and apply with a reputable lender experienced in lending in your local market.
