Disclaimer: This article is for educational purposes only and does not constitute financial advice. Refinancing decisions depend on your individual circumstances. Consult a qualified financial professional before making any mortgage decisions.

Quick Answer

For a conventional rate-and-term refinance, most lenders require at least 20% equity in your home to avoid paying private mortgage insurance (PMI). However, you can refinance with as little as 5% equity on some conventional loans, and certain government-backed programs like the FHA Streamline Refinance or the VA Interest Rate Reduction Refinance Loan (IRRRL) may allow you to refinance with little to no equity at all.

The amount of equity you need to refinance depends on the type of refinance you are pursuing, the type of mortgage you currently hold, and your overall financial profile. Below, we break down the specific equity requirements by loan type so you can find the refinance option that fits your situation.

Key Takeaways

  • 20% equity is the standard threshold to refinance a conventional mortgage loan without paying private mortgage insurance.
  • Cash-out refinance loans typically require at least 20% equity remaining after you take cash, meaning you often need more than 20% equity to start.
  • Government-backed programs like FHA Streamline Refinance and VA IRRRL allow refinancing with minimal or even no equity.
  • Your equity is calculated by subtracting what you owe on your mortgage from what your home is worth.
  • Use Wirly’s refinance calculator to estimate your equity and potential savings before you apply.

Key Terms You Should Know

  • Home equity: The difference between your home’s current market value and the amount you still owe on your mortgage balance.
  • Loan-to-value ratio (LTV): Your loan amount divided by your home’s appraised value, expressed as a percentage. An 80% LTV means you have 20% equity.
  • Private mortgage insurance (PMI): An extra monthly charge added to your mortgage payment when your equity is below 20% on a conventional loan. It protects the lender, not you.
  • Cash-out refinance: A type of refinance where your new loan is larger than your current mortgage, and you receive the difference in cash.
  • Rate-and-term refinance: A refinance that changes your interest rate, loan term, or both – without borrowing additional money.

How to Calculate Your Home Equity

Before you can refinance your mortgage, you need to know how much equity you have. The formula is straightforward:

Home Equity = Current Home Value – Remaining Mortgage Balance

For example, if your home is worth $400,000 and you owe $300,000 on your mortgage, you have $100,000 in equity – or 25%. To find your equity as a percentage, divide your equity by your home’s value: $100,000 / $400,000 = 0.25, or 25%.

To get an accurate picture of your home’s current value, you can check recent comparable sales in your neighborhood, use online valuation tools, or request a professional appraisal. Most lenders will require a formal appraisal during the refinance process.

You can find your remaining mortgage balance on your most recent monthly statement or by logging into your servicer’s online portal. Use Wirly’s refinance calculator to plug in these numbers and see where you stand.

Equity Requirements by Loan Type

The equity requirement for refinancing varies significantly depending on the type of mortgage you have and the type of refinance you want. Here is a breakdown of the most common scenarios.

Conventional Loan Refinance

For a conventional rate-and-term refinance, most lenders prefer that you have at least 20% equity in your home. This gives you an LTV of 80% or lower, which means you avoid paying private mortgage insurance on your new loan.

However, it is possible to refinance a conventional mortgage with as little as 3% to 5% equity. According to the Consumer Financial Protection Bureau (CFPB), borrowers should be aware that if your LTV exceeds 80%, you will likely need to pay PMI, which increases your monthly mortgage payment and can offset any savings from a lower interest rate.

If your goal is to refinance to a conventional loan from a different type of mortgage, you will generally need at least 5% equity – and 20% equity to avoid PMI.

Conventional Cash-Out Refinance

A cash-out refinance lets you tap into your equity in your home by taking out a new mortgage for more than you currently owe. Most lenders require that you retain at least 20% equity after the cash-out, which means you typically need significantly more than 20% equity to qualify.

For example, if your home is worth $400,000, a lender may cap your new loan amount at $320,000 (80% LTV). If your current mortgage balance is $250,000, you could potentially receive up to $70,000 in cash – minus closing costs.

FHA Loan Refinance

If you currently have an FHA loan and want a standard FHA refinance, you generally need at least 20% equity to avoid paying both the upfront and annual mortgage insurance premium (MIP). With less equity, FHA loans require mortgage insurance for the life of the loan in many cases.

However, the FHA Streamline Refinance is a special program for borrowers who already have an FHA loan. This refinance option has reduced documentation requirements and typically does not require a new appraisal – meaning no formal equity requirement. The main requirement is that the refinance must result in a “net tangible benefit,” such as a lower interest rate or a switch from an adjustable-rate mortgage to a fixed rate.

VA Loan Refinance

The VA Interest Rate Reduction Refinance Loan (IRRRL), sometimes called a VA Streamline, is available to eligible veterans who already have a VA home loan. Like the FHA Streamline Refinance, the IRRRL generally does not require an appraisal and has no minimum equity requirement. The primary goal is to help you secure a lower interest rate or switch from an adjustable-rate mortgage to a fixed rate.

For a VA cash-out refinance, lenders may allow up to 100% LTV in some cases, meaning you could potentially refinance with very little equity. However, individual lenders may set stricter requirements, often requiring at least 10% equity.

USDA Loan Refinance

If you have a USDA home loan, the USDA Streamline Assist program allows refinancing with no appraisal and no equity requirement. Like the other streamline programs, the refinance must lower your monthly mortgage payment.

Low- to No-Equity Refinancing Options

If you have limited equity in your home, you still have several paths to refinance your home. Here is a summary of programs designed for borrowers with little to no equity.

  • FHA Streamline Refinance: No appraisal required, no minimum equity. You must already have an FHA loan and demonstrate a net tangible benefit.
  • VA Interest Rate Reduction Refinance Loan (IRRRL): No appraisal required, no minimum equity. Available only to veterans with an existing VA home loan.
  • USDA Streamline Assist: No appraisal required, no minimum equity. You must already have a USDA loan.
  • Conventional refinance with PMI: You can refinance with as little as 3% to 5% equity, but you will pay private mortgage insurance until you reach 20% equity.

Keep in mind that while these programs offer lower equity thresholds, you will still need to meet other qualification criteria. Lenders will review your credit score, credit report, income, and debt-to-income ratio before approving your application.

Risks and Considerations

Refinancing is not always the right move, even if you have enough equity. According to CFPB guidance, borrowers should carefully evaluate the full cost of refinancing before proceeding. Here are key risks to weigh.

Break-Even Period

Refinancing comes with closing costs – typically 2% to 5% of the loan amount. You need to calculate how long it will take for your monthly savings to cover those costs. If you plan to move before reaching the break-even point, refinancing could cost you money. Use Wirly’s break-even calculator to run the numbers.

Resetting Your Loan Term

If you have been paying your original mortgage for 10 years and you refinance into a new 30-year loan term, you are restarting the amortization clock. This means you will pay more in total interest over the life of the new loan, even if your monthly payment drops. Consider a shorter loan term if your budget allows.

Hidden Costs

Borrowers commonly overlook costs such as appraisal fees, title insurance, recording fees, and potential prepayment penalties on their current mortgage. Ask your lender for a full Loan Estimate so you can see every cost before you commit.

Credit Score Impact

Applying for a mortgage refinance triggers a hard inquiry on your credit report. Multiple applications in a short window (typically 14 to 45 days, depending on the scoring model) are usually treated as a single inquiry. However, spreading applications over many months can result in multiple hard inquiries that lower your credit score.

Rate Lock Risks

When you lock in an interest rate, that rate is guaranteed for a set period – usually 30 to 60 days. If your closing is delayed and the lock expires, you may face a higher rate. Ask your lender about float-down options, which allow you to take advantage of rate drops during the lock period.

Common Refinancing Complaints

According to CFPB complaint data from 2024, the most common issues borrowers face with mortgage servicers involve trouble during the payment process and difficulties when applying for a mortgage or refinancing an existing mortgage. Before choosing a lender, check their track record and read the CFPB’s consumer guides. You can also compare options through Wirly’s best refinance lenders page.

Home Equity and Refinancing FAQ

Do you need equity to refinance?

Not always. Government-backed streamline programs like the FHA Streamline Refinance and the VA Interest Rate Reduction Refinance Loan allow refinancing with little to no equity. For conventional refinance loans, most lenders require at least 3% to 5% equity, with 20% equity needed to avoid private mortgage insurance.

How much equity do I need for a cash-out refinance?

For a conventional cash-out refinance, you typically need to retain at least 20% equity after taking cash out. So if you want to borrow against your equity in your home, you will generally need more than 20% equity to start. VA cash-out refinance programs may allow higher LTVs, but individual lender requirements vary.

What is the difference between a home equity loan and a cash-out refinance?

A home equity loan is a second mortgage – a separate loan in addition to your current mortgage. A cash-out refinance replaces your current mortgage entirely with a new loan for a larger amount. Each option has different interest rates, closing costs, and tax implications.

Can I refinance if I owe more than my home is worth?

This situation is called being “underwater.” Standard refinance options require positive equity. However, some special programs have historically been available for underwater borrowers. Check with your loan servicer or a HUD-approved housing counselor to explore your options.

How much equity do I need to refinance to a conventional loan?

To refinance into a conventional loan from another type of mortgage, you generally need at least 5% equity (95% LTV). To avoid paying private mortgage insurance on the new mortgage, you need at least 20% equity. Your credit score, income, and debt levels will also factor into your eligibility.

The Bottom Line

The amount of equity you need to refinance depends primarily on the type of refinance and the type of mortgage involved. While 20% equity is the benchmark for avoiding additional costs like private mortgage insurance, many borrowers can refinance with significantly less equity – especially through government-backed streamline programs.

Before you refinance your mortgage, take the time to calculate your home equity, understand the total costs, and determine whether the savings justify the expense. Start by using Wirly’s refinance calculator and break-even calculator to see if refinancing makes sense for your situation.

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