Equity is the difference between your home's current market value and the amount you still owe on your mortgage. It represents the portion of the home you truly own.
You build equity in two ways: by making mortgage payments that reduce your loan balance, and through increases in your home's market value. For example, if your home is worth $400,000 and you owe $280,000 on your mortgage, you have $120,000 in equity (or 30% equity).
Equity matters for refinancing because lenders look at your loan-to-value ratio (the inverse of your equity percentage) when setting rates. More equity usually means better rates and terms. You typically need at least 20% equity to refinance without paying private mortgage insurance.
You can also tap your equity through a cash-out refinance, which replaces your current mortgage with a larger one and gives you the difference in cash. This can be useful for home improvements, debt consolidation, or other major expenses, but it increases your loan balance and monthly payments.
The loan-to-value ratio is the percentage of your home's appraised value that is financed by the mortgage. LTV is calculated by dividing your loan amount by the home's value.
PMI (Private Mortgage Insurance)Private mortgage insurance is a monthly premium that protects the lender if you default on your loan. PMI is typically required on conventional mortgages when your down payment is less than 20%.
RefinanceRefinancing means replacing your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access your home equity through a cash-out refinance.
See how this affects your refinance
Use real Federal Reserve data to calculate your potential savings.
Try the Refinance Calculator