How much equity do you need to refinance? Home owner guide

Refinancing your home is a structured way to lower your monthly payments, reduce your interest rate, or tap into your equity. But before you can qualify, there’s one thing lenders will be looking at closely: the percentage of your home you actually own. That percentage is called your home equity, and it plays a major role in the type of refinance loan you’re eligible for.

So, how much equity do you need to refinance? The answer depends on your goals, the type of loan you’re applying for, and how much of your home you’ve already paid off. Below, you’ll learn how it all works.

How much equity do you need to refinance? The quick answer

In most cases, lenders want to see that you have at least 20% home equity before approving a refi, especially if you’re shopping for a cash-out refinance.

That said, the exact requirement depends on the type of refinance loan you’re applying for and who your lender is. While you do need equity to refinance in most cases, there are options as low as 3%, or even government-assisted programs that require no equity at all.

If you refinance with less than 20% equity, however, expect to pay a higher interest rate for conventional loans, or be prepared to purchase private mortgage insurance (PMI). PMI is an added monthly cost that protects the lender if you stop making payments.

What’s home equity?

Home equity is the portion of your home’s value you own outright. It’s the difference between what your home is worth and what you still owe on your mortgage.

If your home is valued at $800,000 and your current mortgage balance is $600,000, for example, your equity is $200,000, or 25%. As you pay down your loan and your home increases in value, your equity grows.

How to calculate your home equity

To get a clearer idea of your home equity, start with your home’s current market value. You can use online tools for an estimate, but your lender will require a professional home appraisal during the refinancing process to get a definitive number.

Once you have that estimate, subtract your remaining mortgage balance from your home’s value, like so:

Home equity = Home value − Amount owed on mortgage

The remainder is your equity. To look at it from the lender’s perspective, you can also use a refinance calculator to assess your loan-to-value (LTV) ratio, which denotes how much of your home’s value is still being financed. It’s essentially the inverse of your equity: If you have 20% equity, your LTV ratio is 80%. The lower your LTV ratio, the better your chance of qualifying for more favorable loan terms.

Home equity refinance requirements by loan type

How much equity you need to refinance depends on the type of loan you’re applying for:

— Conventional loans: If you’re planning a cash-out refinance, most lenders will want to see that you’ve built up at least 20% equity in your home, especially if you have a jumbo loan. For a rate-and-term refinance, where you’re adjusting your rate or term without taking cash, you may be able to move forward with as little as 3% equity.

— FHA loans: The standard requirement for an FHA cash-out refinance is also 20%. There’s more flexibility for rate-and-term refinances, which require as little as 2% equity. The FHA also offers a streamlined option with no set equity requirement, as long as the new loan offers a financial benefit and you’ve kept up with your mortgage payments.

— VA loans: VA-backed refinance loans are some of the most lenient when it comes to equity. Depending on the lender, you may be eligible for either a cash-out refinance or a rate-and-term refi even if you have little or no equity at all. Some private lenders, however, may still have their own minimum equity thresholds.

— USDA loans: If you already have a USDA loan, you may be able to do a rate-and-term refinance up to your home’s current appraised value. That means you don’t need any equity to qualify. There’s also a USDA streamline refinance option with no set equity requirement, which can be helpful for borrowers with lower credit scores or limited income.

Using the money vested in your home equity proactively could open the door to better loan terms or extra cash. Better makes it simple to explore your options. You can complete a short application online in as little as three minutes, skip the hidden fees, and get matched with refinancing options built around your goals.

...in as little as 3 minutes – no credit impact

Additional requirements for refinancing your home

Other than your equity, there are several other factors lenders consider when evaluating your refinance request.

Credit score

Most lenders require a credit score of at least 620 for conventional refinancing, though FHA and VA options allow for lower scores. A higher credit score can also help you qualify for better rates.

Debt-to-income ratio

Your debt-to-income (DTI) ratio compares your monthly debt payments to your income. Most lenders prefer a DTI under 36%, though some may approve higher ratios. A lower DTI shows you’re more able to manage your mortgage payments.

Closing costs

Expect to pay 2 to 5% of your loan amount in closing costs. These might include appraisal fees, title services, credit checks, and loan origination fees. Some lenders offer no-closing-cost refinancing, but this usually comes with a slightly higher interest rate.

Income verification

You’ll also need to provide proof of stable income. This may include W-2s, tax returns, pay stubs, and other documentation. If you’re self-employed, your lender may want to see profit-and-loss statements and at least two years of tax filings.

Refinance options if you have low-to-no equity

If your equity stake doesn’t reach the 20% threshold lenders like to see, you still have options. Here are some of the most relevant.

FHA streamline refinance

If you have an FHA mortgage and a solid payment history, an FHA streamline can help you get a lower interest rate or switch to a fixed-rate loan, even with little or no equity. It’s a simplified process that usually doesn’t require a formal home appraisal or income documentation.

VA interest rate reduction refinance loan (IRRRL)

VA borrowers can use an IRRRL to reduce their interest rate or convert to a more stable loan term. There’s no home appraisal, and you can roll your closing costs into the loan, but cash-out refinances aren’t available.

USDA streamlined assist refinance

If your current loan is backed by the USDA, you may be able to refinance up to 100% of your home’s value. There’s no home appraisal required, and eligibility is based on income and your current mortgage standing.

Fannie Mae high LTV refinance (HIRO)

Currently paused but expected to make a reappearance, this program was designed for homeowners with high LTV ratios who are in good standing on their current mortgage. It allows borrowers to reduce monthly payments or shift to a more stable loan structure.

6 steps to refinance a home

Refinancing a home is fairly straightforward. Here’s what to do:

1. Review your current mortgage: Check your existing loan terms, current interest rate, and any early repayment penalties to know where you stand before you refi.

2. Check your credit report: Lenders will carefully examine your credit score and history. You can access free reports weekly from the three major credit bureaus. If anything looks off, address it before you apply.

3. Compare lenders: Get quotes from different lenders to find the best mortgage refinancing deal you can get. Compare interest rates, fees, and closing costs.

4. Gather your documents: You’ll likely need recent pay stubs, W-2s or 1099s, tax returns, and bank statements. Self-employed borrowers may need extra paperwork.

5. Apply for a refinance loan: Once you’ve chosen a lender, send in your application and provide the necessary documents. Most lenders will order an appraisal to confirm your home’s value.

6. Close the loan: After approval, you’ll review final documents and pay any closing costs. There’s usually a three-day grace period before your refinanced loan is finalized.

With Better, you can streamline the process by seeing what you’re pre-approved for in as little as three minutes. If you decide to move forward, you can lock in your rate and complete the rest of your application online — no paperwork or in-office visits.

Refinance without the runaround

When it comes to refinancing your home, the amount of equity you have makes a difference, but it isn’t the only factor. The right loan type, your credit score, and your income all play a role in helping you qualify and get the best terms possible.

Better offers flexible mortgage refinancing solutions designed to help you lower your rate, reduce your monthly payments, or get cash from your home even if you’re working with limited equity. 

Choose Better for no hidden fees, a simple online pre-approval you can complete entirely online, and personalized loan options based on your financial profile and goals.

...in as little as 3 minutes – no credit impact