Can I Refinance My Mortgage with No Equity?
If you’re considering a mortgage refinance but don’t yet own enough of your home’s value, your first step is to determine whether you can refinance a mortgage with no equity. While the process can be a bit trickier, it’s well worth the effort for many borrowers, helping them save money on interest, get out of debt sooner and even lower their monthly mortgage payments.
How to refinance a mortgage with no equity: 5 options
Your home equity is the portion of your home’s value that you own outright. It also represents the dollar amount you’d pocket after selling your home now. For example, if you purchased a $300,000 home and owe $250,000 on your mortgage, you have $50,000 in equity.
But what if you want to refinance home with low equity, no equity or even negative equity (also called being underwater on your loan)? At the most basic level, your equity actually determines whether you’ll be able to refinance and which loan programs you may qualify for. But you still have a few refinance programs to choose from.
Five refinance options to consider if you have low- or no-home equity are:
- FHA streamline refinance
- VA IRRRL
- USDA streamlined assist refinance
- Fannie Mae High LTV Refinance option (HIRO)
- Freddie Mac Enhanced Relief Refinance mortgage
1. FHA streamline refinance
The FHA streamline refinance program provides a refinancing option for homeowners who have an existing FHA loan in good standing and want better loan terms. The program allows you to reduce your interest rate, change your loan term or swap out an adjustable-rate mortgage (ARM) for a fixed-rate loan with more predictable payments. The refinance process is also simpler — the FHA streamline program doesn’t require income verification or a home appraisal.
While the Federal Housing Administration (FHA) doesn’t allow FHA loan closing costs from a streamline refi to be rolled into the new loan, some lenders are still able to offer refinances with no out-of-pocket costs by simply charging a higher interest rate.
See current FHA mortgage rates today.2. VA IRRRL
An interest rate reduction refinance loan (IRRRL) is an option for existing VA loan borrowers looking to refinance with no equity. This program, which is backed by the U.S. Department of Veterans Affairs (VA), allows borrowers to potentially reduce their interest rates, lower their monthly principal and interest payments or move from a variable- to a fixed-rate mortgage.
The VA IRRRL prohibits cash-out refinances, but does let you roll the closing costs into the new loan. As a result, borrowers will pay nothing out-of-pocket upfront. Additionally, the VA doesn’t require an appraisal or a credit check.
Read more about VA loan requirements and eligibility or check out current VA loan rates today.
3. USDA streamlined assist refinance
For homeowners who live in eligible rural areas, the USDA streamlined assist refinance program can provide access to refinance loans up to 100% of your home’s value. These refinance loans are backed by the U.S. Department of Agriculture (USDA), though they are underwritten by approved mortgage lenders.
To qualify for a USDA streamlined assist mortgage refinance, your existing loan must be financed with either a USDA guaranteed or direct loan. Your household income can’t exceed local limits, and you’ll need to apply through a USDA-approved lender.
4. Fannie Mae High LTV Refinance option (HIRO)
Due to low volume, Fannie Mae has temporarily paused the High LTV Refinance program. It is expected to resume in the near future; updates will be available on the Fannie Mae website.
The Fannie Mae LTV Refinance program may be a good fit for conventional loan borrowers with a Fannie Mae-owned mortgage. This program, known as HIRO for short, is offered to homeowners who would benefit from a lower interest rate, a shorter amortized term, a reduced monthly payment (principal and interest) or a more stable mortgage loan product (such as shifting to a fixed-rate mortgage from an adjustable-rate loan).
Borrowers must be in good standing with no 30-day delinquencies in the last six months to qualify. Depending on whether the home is an investment property, second home or your primary home, acceptable minimum loan-to-value (LTV) ratios for the program range from 75.01% to 97.01%.
5. Freddie Mac Enhanced Relief Refinance mortgage
Freddie Mac has paused this program until further notice.
If you have an existing Freddie Mac home loan, and don’t have enough equity to take advantage of the standard Freddie Mac no-cash refi, you may qualify for the Freddie Mac Enhanced Relief Refinance mortgage. While this program is open to any high-LTV Freddie Mac borrowers, it specifically aims to assist homeowners with low (or no) equity due to declining housing prices.
With this refinance mortgage option, borrowers can reduce their monthly principal and interest payments, lower their interest rate or shift to a more stable mortgage product.
This program is available to borrowers in good standing who have a minimum LTV ratio between 75.01% and 97.01%. The maximum LTV ratio for adjustable-rate mortgages (ARMs) is 105%; fixed-rate mortgages have no maximum LTV.
Pros and cons of no-equity refinance loans
If you want to refinance a mortgage with no equity, there are a few important things to keep in mind.
You can lower your interest rate. If mortgage rates have dropped since you purchased your home or if your credit score has improved, a refinance can help you lower your rate. This could save you thousands over the life of your loan. You may be able to reduce your monthly payment. Depending on the refinance program you qualify for and the terms you choose, you may be able to reduce your monthly mortgage payment. This can free up your cash flow or even make it easier to shrink your principal balance. You could switch to a more secure mortgage loan product. If you currently have an ARM loan, refinancing to a fixed-rate loan product allows you to lock in your rate for the duration of your term. You could shorten your loan term. Refinancing may enable you to reduce your overall repayment term, helping you pay off your home earlier and, in some cases, for less interest. | You may pay more in fees. Your refinance will likely involve closing costs, which may be able to be rolled into your new mortgage. These can increase your home’s total cost and may involve an out-of-pocket payment; if you don’t plan to stay in your home for much longer, these fees may exceed any potential refi savings. You could be in debt for longer. Depending on the refinance terms you choose, you may wind up extending your mortgage repayment term. This means it will take longer to pay off your home entirely. You will have limited options. While most lenders will offer refinance loans to homeowners, they almost always have LTV requirements. If you have little or no equity in your home, you'll only be able to refinance through certain lenders or refi programs. You could impact your credit. The mortgage application process often involves hard inquiries, which can temporarily lower your credit score. Replacing your long-standing mortgage with a new home loan can also have an effect. |
6 tips to prepare for the refinance process
If you want to boost your chances at a mortgage refinance approval — especially if you’re trying to refinance your mortgage without equity — there are a few boxes to check before you apply. Here are our top mortgage refi tips:
1. Decide if refinancing is the right move
Are you thinking about refinancing? You can use our refinance calculator to see if it makes sense for you to refinance your current home loan, and how much you could potentially save. This can be especially helpful if you plan to sell your property in a few years, and want to ensure that any fees involved with your refinance will be recouped with savings.
2. Figure out your home’s value
To determine how much equity you have, you’ll first need to know your home’s value. The most accurate way to learn your home’s current market value is to get a home appraisal. In fact, a professional appraisal is an essential component of refinancing, but you can also pay a few hundred dollars out of pocket before you begin the process to see where you stand.
Of course, before you shell out for an appraisal, it’s worth it to get a rough (but free) estimate of your home value. You’ll probably see a lot of variability in estimates, so use a combination of these resources to narrow in on a price point for your house:
- Recent sale prices of comparable homes near you.
- Data or news sources that detail the state of property values in your area.
- The property tax valuation of your home.
- The property tax valuations for comparable homes, which are usually part of the public record.
- Websites that offer free home estimates.
- A conversation with an experienced, local real estate agent, who can provide you with a comparative market analysis. This document will show you how your home compares to other properties that have recently sold in your area and can be used as a tool for valuation.
3. Calculate your current equity
The amount of equity you have in your home is a critical factor in processing your refinancing application. To calculate your equity, simply subtract your remaining mortgage balance from your home’s market value. For example, if you owe $189,000 on your home and its current value is $200,000, you have $11,000 in equity.
4. Calculate your loan-to-value ratio
Your lender will calculate your LTV ratio when reviewing your refinancing application. However, calculating it on your own ahead of time is very simple.
To calculate this ratio, divide your remaining loan balance by your home’s current value. So if you still owe $189,000 on your mortgage and your home’s market value is $200,000, your LTV is 94.5% ($189,000 / $200,000 = 0.945).
5. Research your available options
You may be wondering: How much home equity do I need to refinance my house? The answer depends largely on the lender and/or program(s) you choose. Once you know your current LTV, you can begin researching your refinance options and requirements.
You could be eligible for certain government-backed refinance programs or, depending on your current LTV and the equity needed to refinance, you may even qualify for a conventional program.
Learn more about how to refinance a mortgage.
6. Rate shop
It’s always smart to shop around for the best possible rate anytime you are taking out a new mortgage or refinancing a loan. Though your options will be limited if you’re trying to refinance a mortgage without equity, it’s crucial to rate shop and find additional savings if you have some equity built up in your home.
Platforms like LendingTree make it easy to compare rates with multiple lenders at once. If you find loan terms that you like, you can finalize your application through that lender directly.
See current refinance mortgage rates and best lenders today.