Most refinance lenders require you to have a minimum amount of home equity to qualify for a mortgage refinance. If you don’t have sufficient equity in your home, refinancing can be trickier, and you may have limited options. However, there are specialized programs available that allow qualified borrowers to refinance with no equity.
If you’re looking to refinance with no equity, here are potential options, alternatives, and steps to do it.
Key Takeaways:
- There are several ways to refinance with no home equity, such as a Federal Housing Administration streamline refinance or a USDA streamlined assist refinance.
- Alternatives to refinancing with no home equity include taking out a personal loan to pay off a portion of your mortgage and increase your equity, or waiting until you build more equity.
- Check out the steps to refinancing with no home equity before you take the leap.
How Much Equity Do You Need To Refinance?
When you apply for a mortgage refinance, lenders will require you to go through the underwriting process again to make sure that you’re a safe bet when it comes to paying back your loan. Most lenders will require a loan-to-value ratio of 80% or lower to refinance.
“The magic number is 20%. You’ll almost always need to have at least that much equity in your home if you want to successfully refinance,” says Martin Orefice, CEO of Rent To Own Labs, a real estate platform in Orlando, Florida. “If you have less equity than this, lenders will sometimes be willing to refinance in special circumstances … but it’s not common.”
While it may not be common, there are still several options available to qualified borrowers who want to refinance with little or no home equity.
3 Ways To Refinance Your Mortgage With No Equity
If you have limited or no equity, it still might be possible to refinance your loan, but you likely won’t qualify for a traditional refinance. Instead, you’ll need to use specialized refinance programs, some of which you’ll only qualify for if you already have a specific type of mortgage.
Here are three ways to refinance with no equity.
1. FHA streamline refinance
For borrowers who have an existing FHA loan, an FHA streamline refinance can be a way to refinance with no equity. It’s called a streamline refinance because the process is simplified, requiring limited documentation and underwriting. It also doesn’t require a new home appraisal, and there are no LTV ratio requirements.
The maximum allowable loan amount is determined by the existing FHA loan’s principal balance. An FHA streamline refinance also comes with other requirements. For example, you can’t be delinquent on the loan, and the refinance must create a tangible benefit, such as lowering your monthly payment or mortgage interest rate.
An FHA streamline refinance also restricts you from taking out more than $500 in cash.
2. VA streamline refinance
For borrowers who have an existing Veterans Affairs loan, a VA streamline refinance — also called an interest rate reduction refinance loan, or IRRRL — can be a way to refinance with no equity. The underwriting process is simplified, requiring no credit approval and forgoing a new home appraisal.
To qualify, your LTV ratio may not be equal to or greater than 100%, which means you can refinance with essentially no equity. However, this also means you can’t refinance if you’re underwater on your mortgage, which is when the amount you owe is greater than your home’s value.
A VA streamline refinance requires that you receive a tangible benefit, such as lowering your monthly payment, cutting your interest rate, or moving from an adjustable-rate mortgage to a fixed-rate mortgage. You also must currently live in — or have formerly lived in — the home you’re refinancing.
With this type of refinance, you can’t borrow more than the principal balance of your existing VA loan, plus 2 mortgage points and the funding fee.
3. USDA streamlined assist refinance
A USDA streamlined assist refinance is available to borrowers who have an existing U.S. Department of Agriculture loan. There’s no credit review or new appraisal required. A USDA streamlined assist refinance also has no LTV ratio requirement, meaning qualified borrowers can use this option if they’re underwater on their current mortgage.
However, the tangible benefit required by a USDA streamlined assist refinance is more specific. You need to reduce your interest, principal, real estate taxes, or homeowners insurance payments by at least $50.
There also are income limits, and you must be current on your mortgage for 12 months prior to applying.
Alternatives to Refinancing With No Equity
If you’re struggling to refinance because you don’t have sufficient equity, here are other options.
Personal loan
One option is to take out a personal loan. The funds can be used to boost your home equity by making extra payments to your mortgage principal. With a large enough payment, you may decrease your LTV ratio enough to meet traditional refinance requirements.
However, think very carefully before choosing this risky option. Personal loans typically have higher interest rates than mortgages because they’re unsecured, so you’re trading relatively low-cost debt for higher-cost debt. You’ll also be adding a new bill to your monthly expenses, which may stretch your budget.
Additionally, taking out a personal loan will impact your debt-to-income ratio and credit, which will affect your ability to refinance.
Delay refinancing
A less risky solution is to simply put off refinancing and keep up with your mortgage payments. Each payment you make covers all the interest that accrued that month, plus a portion of the loan’s principal, which increases your equity.
“Continue making regular mortgage payments and wait until you accumulate more equity in your home,” says Joseph Melara, owner of Residential Brokers, a real estate firm in Palm Desert, California. “This could increase your chances of qualifying for refinancing in the future.”
Sell your home and downsize
If you are struggling to handle your monthly mortgage payments and don’t qualify for a refinance, a last resort could be to sell your home. This is likely a better option than missing payments, which can hurt your credit score and lead to foreclosure.
To avoid falling behind on payments, you can sell the property and try buying a smaller home with a less expensive mortgage. However, the proceeds from selling your home need to be enough to pay off your existing mortgage. You’ll also need enough money to make another down payment and pay closing costs on a new home.
Once you’ve downsized, you can then work on building equity in that more affordable home.
7 Steps To Refinance With No Equity
If you have little or no equity in your home, follow these steps to refinance your mortgage.
1. Understand the costs of refinancing
The first thing to consider is the costs of refinancing a mortgage. Just as there were fees and closing costs when you got your original mortgage — such as origination fees and mortgage points — you’ll pay these costs when you refinance.
You can assume refinancing will cost between 2% and 6% of your loan amount in fees. Some lenders may advertise no-closing-cost refinances, but they usually roll the closing costs into your loan or bump the interest rate to compensate, adding to the “hidden” costs of refinancing.
2. Decide if refinancing is right for you
Once you know the cost of refinancing, think about whether refinancing is right for you. There are several questions you should ask before refinancing. For example, if you’re refinancing to save money, will you come out ahead after accounting for the fees?
If you’re trying to lower your monthly payment, you should think about alternative solutions. Selling the home and downsizing — or even renting for a while — may give you time to get back on your feet financially. There are options to sell even if you’re underwater on your mortgage, such as a short sale.
3. Know your home’s value
If you decide refinancing is the right move, the next step is to figure out your home’s value to get a grasp of how much equity you actually have.
You can use sites like Zillow or Redfin to estimate your home’s value. If you bought your home recently and there haven’t been any major changes in the local real estate market, the price you paid for the home could be the estimate.
To truly know your home’s value, you’ll have to work with a professional appraiser. However, this can cost as much as $2,000. Keep in mind that getting a mortgage refinance appraisal may be part of the underwriting process later on, depending on the type of loan you refinance into.
4. Figure out how much equity you have
Once you know your home’s value, determining your equity is relatively easy. Simply subtract the balance of any loan secured by your home — including your mortgage and any home equity loans and home equity lines of credit — from the property’s value.
5. Calculate your LTV ratio
Next, calculate your LTV ratio. To do this, divide the total balance of debts secured by your home by the value of your home.
6. Research options
Once you know your LTV ratio, you’ll have an idea of the refinance programs that you’ll be eligible for. Remember that 80% is usually the maximum LTV ratio for a traditional refinance, though specialized programs have higher LTV ratio limits. For example, if you have an FHA loan with an adjustable interest rate, an FHA streamline refinance is available for qualified borrowers with LTV ratios up to 105%.
Start researching the different programs you can qualify for, and figure out which is the best for your situation.
7. Shop around
The last step is to compare lenders to find the best offer. Look for loans with lower interest rates, but don’t forget to consider all the costs of refinancing, such as mortgage points and other closing costs.
Pros and Cons of Refinancing With No Equity
Before you refinance your mortgage without equity, consider the pros and cons.
Advantages of refinancing with no equity
Some of the benefits of refinancing with no equity include:
- Building equity may become easier. Refinancing gives you the opportunity to lower your monthly payment by extending your loan term or lowering your interest rate. With a lower monthly payment, you may have more funds available to make principal-only payments and get out of the cycle of not being able to build equity.
- You may experience a faster closing. A streamlined refinance doesn’t require as much borrower documentation and underwriting, which means it might not take as long as a traditional refinance to close. This can be helpful if you’re currently struggling to keep up with your payments.
Drawbacks of refinancing with no equity
Drawbacks of refinancing with no equity include:
- There are refinancing closing costs. Refinancing a mortgage isn’t free. Expect to pay between 2% and 6% of your loan balance in fees when you refinance. You may be better off putting these fees toward principal-only payments to increase equity.
- Limited options. With no equity, you’ll have very limited options to choose from when refinancing, meaning it can be difficult to find a good deal.
Can You Refinance If You’re Underwater on a Mortgage?
If you’re underwater on your mortgage, you’re in a tricky spot. Refinancing can be difficult because your home isn’t worth enough to secure a new loan. Even selling the home won’t get you enough cash to pay off your current mortgage.
Some programs do make it possible to refinance while underwater, but it isn’t common. For example, the FHA streamline refinance lets you refinance with negative equity. However, outside of specialized programs, you’ll struggle to find a willing mortgage lender.
FAQ: Refinancing With No Home Equity
Here are answers to some frequently asked questions about refinancing your mortgage with no equity.
Refinancing with low equity is hard, but it’s not impossible. It’s easiest if you have a mortgage through a specialized government loan program — such as an FHA, VA, or USDA mortgage — and can also use its specialized refinance program. If you don’t have a government-backed loan, your options are far more limited.
It’s possible to refinance a mortgage with bad credit, but it’s more difficult than if you have good credit. You can also expect to pay higher interest rates and fees.
Typically, you can’t borrow 100% of your home equity. However, some loan programs — such as VA loans or USDA loans — offer mortgages with a 100% LTV ratio.
The Freddie Mac Enhanced Relief Refinance Mortgage program and the Fannie Mae high LTV refinance option were suspended in the summer of 2021. Prior to their suspension, these two refinance options allowed qualified borrowers to refinance with no equity. You can check each website for updates and details.
The Bottom Line on Refinancing With No Equity
Refinancing when you have no equity in your home is difficult, but there are options available, especially if you have an existing FHA, USDA, or VA loan. Before you refinance, take the time to consider alternatives and make sure refinancing will help you accomplish your goals. Also, be sure to shop around for the best rate available.
