- How To Refinance A Mortgage With No Equity
- How much home equity do I need to refinance my mortgage?
- Fannie Mae, Freddie Mac refinances for low- to no-equity mortgages
- High LTV Refinance Option from Fannie Mae
- Freddie Mac Enhanced Relief Refinance Mortgage
- Do you have a Fannie Mae or Freddie Mac mortgage?
- Personal loan, then refinance option
- Learn more:
- Requirements to Refinance Your Mortgage | How to Qualify
- Credit score to refinance
- Conventional loan
- FHA loan
- VA loan
- Debt-to-income ratio
- FHA loans
- VA loans
- Refinance waiting period
- Net tangible benefit
- Cash-Out Refinance: How It Works and When to Get One
- What is cash-out refinancing and how does it work?
- Benefits and risks of cash-out refinancing
- Alternatives to cash-out refinancing
- Personal loan
- Limited cash-out refinancing
- Home equity loan
- Home equity line of credit
- Frequently asked questions
How To Refinance A Mortgage With No Equity
Today’s low mortgage rates have more homeowners dreaming of a lower rate and the smaller monthly payments that go with it, but it’s important to remember that when it comes to refinancing your mortgage, home equity matters.
How much home equity do I need to refinance my mortgage?
For conventional refinances, you’ll need at least 20 percent equity in your home to avoid private mortgage insurance, or PMI. This also means you generally need a loan-to-value (LTV) ratio of no more than 80 percent. You can use Bankrate’s LTV calculator to find out your ratio.
Home equity is the cash value in your home. For instance, if your home is valued at $300,000 and you owe $200,000, your home would have $100,000 of cash value, or equity. If you don’t have enough home equity, PMI may be required. This is a type of insurance borrowers pay to protect the lender in the event the borrower defaults on the loan.
For those who are underwater on a home loan (in other words, you owe more than the home is worth) or have little to no equity, your options include two programs from Fannie Mae and Freddie Mac.
Fannie Mae, Freddie Mac refinances for low- to no-equity mortgages
Fannie Mae and Freddie Mac were created by Congress to provide stability and affordability to the mortgage market. Both companies buy mortgages from lenders, which means they may own your mortgage. In fact, they own or back over 90 percent of home mortgages in America.
Anticipating the end of the HARP program, the Federal Housing Finance Agency (FHFA) worked with Fannie Mae and Freddie Mac to develop new refinance programs targeting existing high loan-to-value loans, said Maria Fernandez, senior associate director for the Federal Housing Finance Agency’s Office of Housing and Regulatory Policy.
Two options are the Freddie Mac Enhanced Relief Refinance Mortgage and the High LTV Refinance Option from Fannie Mae. Though they have different names, both programs, which are for people who have existing Freddie Mac or Fannie Mae mortgages and who meet certain eligibility requirements, are quite similar, said Fernandez.
“The programs offer a simplified process and require a borrower benefit such as a lower payment, more stable product or a shorter term, which fosters mortgage sustainability and helps to minimize credit losses to Fannie Mae, Freddie Mac and taxpayers,” Fernandez said.
Here are the key details of each program:
High LTV Refinance Option from Fannie Mae
the Freddie Mac program, the High LTV Refinance from Fannie Mae is designed for existing Fannie Mae borrowers who are making their mortgage payments on time but whose loan-to-value ratio exceeds the maximum allowed for standard limited cash-out refinance transactions. The minimum LTV requirement varies depending on the number of units in the home and whether you’re doing a cash-out refinance or limited cash-out refinance, but generally ranges from 75 percent to 97 percent.
The program requires that borrowers benefit from the refinance in at least one of several ways:
- Reduced monthly principal and interest payment
- Lower interest rate
- Shorter term
- More stable mortgage, such as shifting from an adjustable-rate mortgage to a fixed-rate mortgage
The High LTV loan also offers simplified employment, income and asset documentation requirements.
Freddie Mac Enhanced Relief Refinance Mortgage
The Freddie Mac Enhanced Relief Refinance is aimed at borrowers who have existing Freddie Mac mortgages and are making timely payments, but are unable to take advantage of standard “no cash-out” refinance programs because their mortgage exceeds maximum loan-to-value (LTV) limits. Depending on the kind of property, the program accepts borrowers with LTV ratios as high as 97 percent.
In particular, the Enhanced Relief Refinance targets borrowers who have been unable to refinance due to declining property values.
Conventional 15-, 20- or 30-year fixed-rate mortgages are eligible for this program. Also noteworthy, all occupancy types are able to participate.
In order to qualify, your mortgage must not have been 30 days delinquent during the past six months. In addition, it must not have been 30 days delinquent more than once over the past 12 months.
Do you have a Fannie Mae or Freddie Mac mortgage?
If you’re unsure whether you have a Fannie Mae or Freddie Mac mortgage, find out by visiting the following websites:
- Fannie Mae Loan Look-Up
- Freddie Mac Loan Look-Up
Once a homeowner determines whether their mortgage is owned or guaranteed by Fannie Mae or Freddie Mac, they can pursue a refinance either through their existing lender or any other lender approved to do business with Freddie Mac or Fannie Mae, said Fernandez.
Personal loan, then refinance option
Yet another alternative for homeowners who may be underwater on their mortgage is paying down the amount owed with a personal loan, said Joseph Polakovic, owner of Castle West Financial.
“A homeowner could take out a personal loan and pay into their home to a point where they have enough equity to conduct the refinance,” explained Polakovic.
After paying down the mortgage and conducting the refinance, the homeowner might consider applying for a home equity line of credit (HELOC) on the home and using the funds to help pay off the personal loan, suggested Polakovic.
“Ultimately, this would lower their effective borrowing interest rate, as they would have brought down the interest rate and loan amount on their home from the refinance,” said Polakovic.
Bear in mind that economic uncertainty can make it difficult to get a personal loan unless you have good credit, and some lenders have ceased HELOC applications temporarily.
Overall, this option requires understanding exactly how much new debt (in the form of the personal loan) you can take on while still falling below the maximum debt-to-income allowed for a refinance.
If you’re unsure about any of this, consult a financial adviser before proceeding.
Requirements to Refinance Your Mortgage | How to Qualify
Refinancing your mortgage isn't just a matter of swapping one home loan for another. You have to apply and meet refinance requirements set by the lender and loan program, just as you did when purchasing your home. In addition, the mortgage refinance must meet certain standards to benefit you financially.
Here are some of the basic refinance requirements you may encounter.
» MORE: How to refinance your mortgage
Refinancing your mortgage can be a great way to save. With NerdWallet, you can easily track your home value and see if you can save by refinancing.
Credit score to refinance
Generally, mortgages backed by the Federal Housing Administration or the Department of Veterans Affairs have looser credit requirements than conventional home loans, which aren't backed by the federal government.
But lenders have been tightening credit standards for all mortgages in recent months. Of borrowers who refinanced in July 2020, 90% had FICO credit scores of 700 and above, according to mortgage data provider Ellie Mae. Ten percent had credit scores of 600 to 699, and less than 1% had scores under 600.
Tap to learn how COVID-19 may affect refinancing
Due to the coronavirus pandemic, refinancing your mortgage may be a bit of a challenge. Lenders are dealing with high loan demand and staffing issues that may slow down the process.
Also, some lenders have increased their fees or temporarily suspended certain refinance products. If you can’t pay your current home loan, refer to our mortgage assistance resource.
For the latest information on how to cope with financial stress during this pandemic, see NerdWallet’s financial guide to COVID-19.
The minimum credit score for a conventional mortgage refinance is usually at least 620.
The FHA's minimum credit score is 500 for a cash-out refinance and 580 for a credit-qualifying FHA streamline refinance. But lenders often require higher scores. The FHA also has a noncredit qualifying streamline refinance option, which doesn't require the lender to do a credit check.
The VA doesn't require a minimum credit score for VA mortgages, but lenders set their own criteria. A minimum credit score for a VA mortgage refinance is usually at least 620.
» MORE: Can I refinance my mortgage with bad credit?
Refinance lenders will usually check to make sure you have sufficient income to repay the mortgage and look at your debt load.
Your debt-to-income ratio, or DTI, is the portion of your monthly pretax income that goes toward debt payments, including your mortgage. The lower the ratio, the better. Lenders to see a debt-to-income ratio of 36% or below.
You can qualify for a refinance loan with a higher DTI, but you may pay a higher interest rate.
Your home must be worth more than the amount you owe for standard conventional loan refinancing. A lender will usually require an appraisal to estimate the home value.
Home equity is the difference between your mortgage balance and the value of the home. If you’re refinancing a conventional loan to get rid of private mortgage insurance, your home equity must be at least 20% of the home value.
Cash-out refinancing lets you tap into some of your home equity by borrowing more than you owe — but less than the house is worth.
Generally, lenders limit the cash-out amount to 80% or 90% of your home equity.
After the cash is taken out, the loan-to-value ratio will need to be 90% or less, meaning that you still have at least 10% equity in the home. The precise threshold depends on the lender.
Owe more than your home is worth? You might qualify for one of two programs: the Freddie Mac Enhanced Relief Refinance or the Fannie Mae High Loan-to-Value Refinance program. Both are geared toward homeowners who owe more than 97% of the value of their homes.
» MORE: Learn about HARP replacement refi options
The FHA streamline refinance doesn't always require an appraisal, but the FHA cash-out refinance does. You'll need at least 20% in equity to qualify for an FHA cash-out. The maximum loan-to-value ratio after the transaction is usually 80%.
You may not need any home equity for a VA refinance loan.
A VA appraisal is required for a VA cash-out refinance. You may be able to borrow up to 100% of the appraised value of your home, although this will vary by lender.
» MORE: VA cash-out refinance: How it works
Refinance waiting period
In some instances, you'll need to wait a certain period after getting a mortgage to refinance. The rules vary by the type of mortgage.
Generally, you can refinance a conventional loan as often as you would if you don't extract cash from the transaction.
To do a conventional cash-out refinance, you'll need to have owned the home at least six months, unless you inherited the property or were awarded it in separation, divorce or domestic partner dissolution.
The required waiting period to refinance an FHA, VA or USDA mortgage varies from six to 12 months.
» MORE: How often can you refinance your mortgage?
Net tangible benefit
“Churning” is an aggressive sales practice in which lenders lure borrowers to refinance frequently when it's not in consumers' best interests.
To prevent such predatory lending, federal agencies and many states require that borrowers receive a financial advantage from refinancing, known as a “net tangible benefit.” For example, a net tangible benefit may include a reduction in the interest rate or a move from an adjustable- to fixed-rate loan.
Federal agencies have net tangible benefit standards for government-backed loans, such as FHA and VA loans. And many states have laws that apply to mortgages that aren't backed by the federal government.
When you refinance, the lender will have to make sure the new loan meets the applicable rules for providing a net tangible benefit.
Cash-Out Refinance: How It Works and When to Get One
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
If you need money for home improvements, paying down debt, or financing other major expenses, you could consider tapping into your home’s equity with a cash-out refinance.
With a cash-out refinance, your existing mortgage is paid off and replaced by a new loan with a higher loan amount than what you owe on your home. You get the extra amount, minus any closing costs, as a lump sum payment to use as you wish.
Here’s what you should know about cash-out refinancing:
What is cash-out refinancing and how does it work?
Cash-out refinancing lets you use the equity in your home (the difference between how much your home is worth and how much you owe on your mortgage) to take out a larger mortgage.
The new mortgage pays off your old mortgage, then you get the difference between the two, minus closing costs, as cash. traditional mortgage refinancing, your new loan will most ly have different terms than your old one.
If you decide that cash-out refinancing is right for you, be sure to consider as many lenders as possible to find the best deal. Credible makes this easy — you can compare multiple lenders and see prequalified rates in as little as three minutes.
Learn More: How to Refinance Your Mortgage
Benefits and risks of cash-out refinancing
Before refinancing your loan, make sure you consider the advantages and disadvantages of cash-out refinancing.
- Low interest rate: Cash-out refinances are secured debt with your home acting as collateral. They have lower interest rates than credit cards or personal loans, which can make them a cost-effective option for financing projects home renovations.
- Larger loan amount: Depending on how much equity you have in your home, you might be able to get a larger amount of cash than you could with alternatives a personal loan.
- Savings on high-interest debt: If you use cash-out refinancing to consolidate high-interest debt ( credit card debt), you can pay off your balances sooner and possibly save thousands of dollars thanks to a lower interest rate.
- Longer repayment term: Because a cash-out refinance is essentially a new mortgage, you’ll have 15 to 30 years to repay it. With a longer repayment term, you’ll have more affordable monthly payments than you would with a credit card or personal loan, which usually have shorter terms.
Find Out: Should You Refinance to Pay for Home Improvements?
- Foreclosure risk: Your home serves as collateral with cash-out refinancing. If you fall behind on your loan payments, the bank can foreclose on your house, meaning you could lose your home.
- Closing costs and fees: Just when you bought your home, you’ll have to pay closing costs and fees.
This includes appraisal fees, credit report fees, and title fees, adding thousands of dollars to your loan costs. You might be able to roll these costs into your loan amount, but keep in mind that you could end up paying more in interest this way.
- Lengthy application and approval process: When you apply for cash-out refinancing, you’ll have to go through the mortgage approval process. This can take several days or even weeks, so if you need the money right away, you might be better off with another financing option.
- Lending requirements: To qualify for cash-out refinancing, you’ll have to meet the lender’s mortgage requirements. Typically, you’ll need fair to good credit — usually a score of at least 620. You’ll also need to have a debt-to-income ratio of 50% or less, plus a sizable amount of equity in your home.
If you decide that a cash-out refinance is right for you, take the time to shop around and compare lenders to find the right loan for you. Credible can help you do this — and you only have to fill out a single form.
Find My Cash-Out Refi Rate
Alternatives to cash-out refinancing
If you decide that a cash-out refinance isn’t right for you, you have other financing options.
A personal loan is unsecured, meaning it doesn’t require any collateral. You can typically borrow anywhere from $1,000 to $100,000, depending on the lender and your credit history. Personal loans generally come with repayment terms ranging from three to seven years.
Limited cash-out refinancing
a cash-out refinance, limited cash-out refinancing lets you access some of your home equity. But it also comes with some limitations on how you can use the money.
Limited cash-out refinancing can usually be used only for one of the following situations:
- Paying for the closing costs and fees of refinancing your mortgage
- Repaying a Property Assessed Clean Energy (PACE) loan or a loan you took out for other energy-related home improvements
- Buying out a co-owner
- Converting a construction loan
- Consolidating a first and second mortgage into a new, single loan
- Paying off a Home Equity Line of Credit (HELOC)
Learn More: When to Refinance a Mortgage
Home equity loan
With a home equity loan, you can access the equity you’ve built in your home by taking out a second mortgage. Instead of having a line of credit, you’ll get a one-time, lump-sum payment.
Home equity loans typically come with a fixed interest rate, which means you can lock in a set payment amount for the life of the loan. Also keep in mind that because a home equity loan is a second mortgage, interest rates might be slightly higher than for a new first mortgage.
Home equity line of credit
A home equity line of credit (HELOC) is another way to access the equity in your home by using your home as collateral. Rather than taking out a lump sum, a HELOC lets you repeatedly tap into and pay off the funds you would with a credit card. Keep in mind that there’s usually a minimum draw requirement, though.
With a HELOC, you’ll typically have a variable interest rate. This means the rate will go up and down along with an index ( the prime rate or LIBOR).
|Home renovations||Cash-out refinancing|
|Debt consolidation||Cash-out refinancing|
|Education expenses||Home equity loan|
|Short-term cash needs||Personal loan|
|Recurring cash needs||HELOC|
Frequently asked questions
Closing costs are typically 2% to 5% of the loan amount. For example, on a typical $180,000 cash-out refinancing loan, you’d have to pay $3,600 to $9,000 in closing costs.
Some lenders might allow you to roll these costs into your loan amount so you can repay them along with the rest of the loan.
Most lenders require you to retain at least 20% equity in your home, so the most you can get is 80% of your home’s total value, minus whatever you still owe on your mortgage.
For example, if you have a home worth $300,000 and owe $100,000 on your mortgage, you have $200,000 in equity. If that’s the case, the maximum you can borrow with a cash-out refinance loan is $240,000 — $100,000 to pay off your existing loan plus $140,000 in cash out.
To qualify for cash-out refinancing, you need to have at least the following:
- A credit score of at least 620
- A debt-to-income ratio under 50%
- Enough equity in your home that you can retain 20% equity after the cash-out refinance
Because the money you take out with cash-out refinancing is a loan, the IRS doesn’t view it as income. This means you don’t have to report it when you file your taxes. However, doing so might get you a beneficial tax deduction.
Some, or possibly all, of the interest you pay on your mortgage might be deductible. Speak to a tax professional to understand your mortgage interest tax deduction options.
Be sure to shop around and compare rates with multiple lenders if you decide to go with a cash-out refinance. You can do this easily with Credible — and you’ll be able to see your prequalified rates in only three minutes.
Learn More: Cash-Out Refinance Tax Implications
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