Can You Refinance Your Home Even If You Have Low Equity?

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Updated on Thursday, January 17, 2019

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Want to refinance your house to snag a lower interest rate, change mortgage terms or lower your monthly payment? Even if you worry that you don’t have enough equity, it’s worth exploring your options.

The amount of equity needed to refinance a home varies by loan program, said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. Some lenders will allow you to refinance with equity of 3.5% or lower, though having equity of 10% or higher will give you more options.

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“The level of equity usually isn’t an obstacle to refinancing unless you’re underwater,” Kapfidze said. Being underwater with your mortgage, also known as having negative equity, means you owe more than your home is worth. That can happen when the value of a home drops significantly, as happened across the country during the Great Recession. “If you’re underwater, then it gets pretty difficult,” he continued.

What happens if you do try to refinance with very little equity? Your refinance application could get denied or you could get offered a loan with a higher interest rate — having little equity will make your loan-to-value ratio, or LTV, higher. “Interest rate rises with LTV,” Kapfidze said. “So, if you have a high LTV, you typically will get a higher interest rate.”

But you won’t know how much equity you have until you talk with a lender and get a valuation of your property. Home prices across the country have been growing, which might mean your house has appreciated in value. That could result in a pleasant surprise when your home is appraised. “Don’t make an assumption about how much equity you think you have,” Kapfidze advised.

However, you may want to get a rough idea of your equity before approaching a bank, credit union or other lender to discuss refinancing. In that case, the first step is to estimate the value of your home.

How to calculate your home’s actual value

The amount you paid for your home may be very different from its current value. Besides changes that may have happened with home values in your neighborhood, any improvements you’ve made such as a bathroom or kitchen remodel can boost your home’s value.

So how do you know what your home is worth? Here are six ways to estimate your home’s value before you apply for a refi:

  1. Look at recent sales of comparable properties. Did a “Sold” sign just go up in your neighbor’s yard? If so, you may be in luck. The recent sale of a comparable home, or “comp,” — a house that is similar to yours in square footage, number of bedrooms and bathrooms, landscaping and even style — offers a good way to gauge your home’s current value. You can check the selling price of comparable homes near you by searching sold homes by city, neighborhood or zip code on real estate sites such as Realtor.com
  2. Consult local real estate brokers. Another good way to find out how much your home is worth: Contact your friendly neighborhood broker or the agent you used when you bought your home. These pros can take a look at your home and run a quick search to come up with a value. In fact, many real estate agents will do a market analysis for you for free.
  3. Contact a local appraiser. Getting your own professional appraisal may be the most accurate way to determine the value of your home. However, an appraisal will typically cost you $300 to $400 or more.
  4. Use an online tool. For example, Chase offers a free home value estimator that allows you to punch in your address and get an estimated value in seconds. The tool works by searching a database of millions of home sale prices. LendingTree also offers a home value calculator. Consider the results rough guidelines as to your home’s value.
  5. Check news reports about the real estate market. News reports about local home prices also can be a good source of general information to help you figure out what your home is worth. While they won’t put a dollar value on your particular home, you can get a sense of the home value trends in your area.
  6. Property tax valuations. While it may be useful to take a look at property tax valuations as you gather information, don’t put too much stock in this number when trying to determine your home’s value, Kapfidze said. “Property tax valuations typically are not equal to market valuations,” he said.

What to do if your appraisal is too low

When you apply to refinance your mortgage, an appraiser will typically thoroughly evaluate your home and come up with an official market value for the property. It can be disheartening when you the appraiser hangs a low price tag on your property. Worse, it can threaten your dream of getting a better mortgage.

So, what can you do if your appraisal comes back too low? There are steps you can take if you believe an appraisal is incorrect, according to the Appraisal Institute, a professional organization of real estate appraisers. First, get a copy of the appraisal from your lender, read it carefully and make note of any errors. For example, “miscalculation of gross living area” is a common mistake, according to the institute.

If you find problems, or know of any comparable home sales that weren’t factored in, talk to your lender to find out how to appeal the appraisal and request another, the institute recommends.

Next time, check the appraiser’s qualifications in advance and, if your lender allows it, walk through your property with the appraiser to provide information and answer any questions about your property.

How to calculate your home equity

The formula to determine home equity is pretty simple. Just take the current market value of your home and subtract the balance of your primary mortgage. For example, if your home is worth $100,000 and you owe $90,000, you have $10,000 in equity.

To get your percentage of home equity, divide the equity amount by the market value. In this example, that would be $10,000 divided by $100,000, or 10% equity. That would be enough equity to refinance with many lenders, according to Kapfidze.

Low-equity refinance options

If you do have lower equity in your home, there are several options that may still allow you to refinance your home. Start by checking out these programs:

  • FHA refinance. If you already have a mortgage backed by the Federal Housing Administration (FHA), you may be able to get an FHA Streamline Refinance loan. This loan can be a great option if you have little or no equity in your home, or even if you are underwater. The program offers several advantages, including very low interest rates and quick closings. And when you apply for an FHA Streamline Refinance, you don’t need another appraisal on your home.
  • VA loan refinance. If you have a VA Home Loan, you may be able to get a VA Interest Rate Reduction Refinance Loan. A loan through this program allows veterans to refinance at affordable rates. No appraisal or closing costs are required. The U.S. Department of Veterans Affairs strongly recommends that veterans contact several lenders to compare terms and that they be wary of anyone who contacts them about refinancing.
  • Fannie Mae or Freddie Mac refinance. If you have an existing mortgage loan with Fannie Mae or Freddie Mac, you may be able to get a refinance — even with a high LTV. The Freddie Mac Enhanced Relief Refinance became available on November 1, 2018, and the Fannie Mae High Loan-to-Value Refinance option became available on November 1, 2018. Both programs may offer lower interest rates, shorter amortization terms and lower monthly mortgage payments.

The bottom line: “Regardless of what equity level you think you have, talk to multiple lenders and you’ll probably find one that will work with you,” Kapfidze said. The more lenders you talk to, the better your chance of finding a program that will help you refinance.

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