Can You Refinance with Less Than 20% Equity? Here’s What You Need to Know

Refinancing your mortgage can offer many benefits, such as lower interest rates, reduced monthly payments, or accessing home equity. But what if you have less than 20% equity in your home? Is refinancing still an option? Let’s dive into the details to help you understand your choices and make an informed decision.

Understanding Home Equity

Home equity is the portion of your property that you truly own, calculated as the difference between your home’s current market value and the remaining balance on your mortgage. Traditionally, lenders prefer borrowers to have at least 20% equity when refinancing. However, having less than 20% equity doesn’t necessarily disqualify you from refinancing.

Refinancing Options with Less Than 20% Equity

1. FHA Streamline Refinance

For homeowners with an existing FHA loan, the FHA Streamline Refinance program is a great option. This program doesn’t require an appraisal or extensive documentation, and it allows refinancing even if you have little to no equity. The primary requirement is that you must be current on your mortgage payments.

2. HARP (Home Affordable Refinance Program)

Although the HARP program ended in 2018, its successor, the Fannie Mae High Loan-to-Value Refinance Option, helps homeowners who owe more than their home’s worth. This option is designed for borrowers who are current on their mortgage but have high loan-to-value (LTV) ratios.

3. VA Interest Rate Reduction Refinance Loan (IRRRL)

Veterans and active military members with a VA loan can take advantage of the IRRRL program. This refinancing option, also known as the VA Streamline Refinance, requires no appraisal or credit underwriting, making it accessible for those with less than 20% equity.

4. Private Mortgage Insurance (PMI)

If you’re refinancing a conventional loan with less than 20% equity, you may need to pay for Private Mortgage Insurance (PMI). While this adds to your monthly costs, it can still be beneficial if you secure a significantly lower interest rate.

5. Lender-Paid Mortgage Insurance (LPMI)

Some lenders offer Lender-Paid Mortgage Insurance, where they cover the PMI costs in exchange for a slightly higher interest rate. This can be an alternative if you want to avoid monthly PMI payments.

Considerations Before Refinancing

1. Costs and Fees

Refinancing involves closing costs, which can range from 2% to 5% of the loan amount. Ensure you calculate whether the long-term savings outweigh the upfront costs.

2. Credit Score

A higher credit score can help you secure better refinancing terms. Check your credit report and address any discrepancies before applying.

3. Loan Terms

Evaluate the new loan terms carefully. A lower interest rate is attractive, but extending your loan term could result in paying more interest over time.

4. Break-Even Point

Calculate your break-even point to understand how long it will take to recoup the refinancing costs through lower monthly payments. This will help you decide if refinancing is a wise financial move.

Final Thoughts

Refinancing with less than 20% equity is possible, but it requires careful consideration of your options and financial situation. Programs like FHA Streamline, VA IRRRL, and high LTV options can provide pathways to refinancing. Be sure to weigh the costs and benefits, and consult with a financial advisor or mortgage professional to determine the best strategy for your unique circumstances.