Key Takeaways
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Most lenders require at least 20% home equity to approve a conventional refinance.
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Government-backed programs can help low-equity homeowners refinance more easily.
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Your loan-to-value (LTV) ratio determines eligibility and influences your refinance rate.
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Consistent mortgage payments and appreciation build equity and expand refinance options.
Refinancing your mortgage can help you lower your monthly payment, shorten your loan term, or access your home’s equity. But one key factor determines your eligibility — how much home equity you have. Understanding the minimum equity needed to refinance a mortgage can help you plan effectively, especially if your goal is to secure better terms or reduce long-term costs.
What Is Home Equity?
Home equity represents the portion of your home that you truly own — it’s the difference between your property’s market value and your outstanding loan balance.
Example:
| Home Market Value | Mortgage Balance | Home Equity |
| $400,000 | $200,000 | $200,000 (50%) |
The more equity you build, the less financial risk lenders take on — making it easier to qualify for a refinance or access better rates.
Understanding the Loan-to-Value (LTV) Ratio
Your loan-to-value ratio (LTV) compares your current mortgage balance to your home’s appraised value. Lenders use it to gauge refinancing eligibility.
| Loan Balance | Home Value | LTV Ratio |
| $240,000 | $300,000 | 80% |
Most lenders prefer an LTV of 80% or lower, meaning you should ideally have 20% equity in your home before refinancing.
However, depending on the loan program, that percentage can vary.
How Much Equity You Need to Refinance
The amount of home equity required depends on the type of refinance you’re applying for:
- Conventional refinance: Usually requires 20% equity (80% LTV). Having this much equity helps you avoid private mortgage insurance (PMI) and secure lower rates.
- FHA refinance: FHA cash-out refinances typically need borrowers to have at least 20% equity remaining after closing.
- VA refinance: A VA cash-out refinance allows qualified veterans to borrow up to 100% of their home’s value, depending on lender guidelines.
While conventional refinances are stricter, government-backed options like FHA and VA loans provide more flexibility — ideal for homeowners still building equity.
Refinance Options When You Have Little or No Equity
If your equity is low, you may still qualify for certain refinance programs designed to help homeowners who owe close to or more than their home’s value.
- FHA Streamline Refinance: For current FHA borrowers with at least 210 days since their last loan closing and a history of on-time payments. It doesn’t require an appraisal or income verification.
- VA IRRRL (Interest Rate Reduction Refinance Loan): Available to veterans with an existing VA loan. This program allows you to lower your rate or switch from an adjustable-rate to a fixed-rate mortgage.
- USDA Streamlined Assist Refinance: Designed for USDA borrowers who’ve made 12 consecutive on-time payments. It can lower monthly payments by at least $50 and doesn’t require an appraisal.
If you’re just short of the equity needed, one option is to pay down your mortgage balance using savings or a personal loan. However, be cautious — taking on new debt to refinance can offset potential benefits.
(Note: Programs like FMERR and Fannie Mae’s High LTV Refinance Option are currently suspended.)
Is Now a Good Time to Refinance?
When mortgage rates drop, refinancing can help you save money over time. If your goal is to reduce payments, shorten your loan term, or tap into equity for renovations or debt consolidation, timing is key.
Even if you don’t meet the 20% equity mark now, continuing to make regular payments and waiting for home appreciation can put you in a better position later. Building equity naturally opens the door to more refinancing opportunities and improved terms.
FAQs About Refinancing and Home Equity
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