How Home Equity Affects Your Refinance Options
Your home equity is one of the most important factors in your refinance. After 17 years as a licensed mortgage broker working with clients nationwide, I have seen home equity open doors for borrowers who did not realize how much appreciation had worked in their favor. It affects your rate, your loan options, and how much you can borrow.
What Is Home Equity?
Home equity is the difference between what your home is worth and what you owe on it. If your home is worth more than your mortgage balance, you have positive equity.
You build equity two ways: paying down your loan balance and home value appreciation. Many homeowners are surprised by how much equity they have, especially if their home has gone up in value. For the full formula and a worked dollar example, see how home equity is calculated.
How Equity Affects Your Rate
Lenders see borrowers with more equity as lower risk. Lower risk generally means better pricing. The thresholds that matter most are:
- 80 percent LTV or less: Stronger conventional pricing. No PMI required.
- 70 percent LTV or less: Even better rate options.
- 60 percent LTV or less: Typically the strongest rate tier.
If your equity puts you just below one of these thresholds, it can make a real difference in the rate you are offered.
How Equity Affects PMI
Private mortgage insurance is required on conventional loans with less than 20 percent equity. If your home has appreciated and you now have 20 percent or more, refinancing can eliminate PMI from your payment entirely.
How Equity Affects Cash-Out Options
The more equity you have, the more cash you can access through a cash-out refinance. Most conventional lenders let you borrow up to 80 percent of your home's value, in line with Fannie Mae and Freddie Mac guidelines. VA loans may allow up to 100 percent.
What If You Have Little Equity?
You still have options.
- VA refinance options can go up to 100 percent LTV.
- If your equity is close to 20 percent, a rate-and-term refinance without cash-out may still work.
How to Estimate Your Equity
Check your most recent mortgage statement for your balance. Then estimate your home's value using online tools or recent sales in your neighborhood. The difference is your approximate equity. The official number comes from the appraisal during the refinance.
Check your rate at Lendtrain to see how your equity affects your options. For more detail on LTV, see what is loan-to-value ratio.
Rate quotes are estimates based on the credit score you enter. Actual rates may differ based on verified credit, income, and property details.