Can You Refinance With Your Equity?

Written by
David Mully
Read Time: 4 minutes

With mortgage rates once again near historic lows, you might be one of the many homeowners who would like to refinance their mortgage. The question is, do you have enough home equity to do it?

Your home equity is the #1 factor in determining whether or not you can refinance your mortgage. In the current market, lenders just aren't willing to offer you a new loan unless you have at least some equity in the property.

How much home equity is enough?

How much? Well, 20 percent is the standard required to get the best interest rates - anything less than that and you'll probably end up paying another one-eighth to one-quarter of a percentage point more in interest. You're still probably on good ground at 10 percent, though 5 percent may be a bit iffy, particularly if you're in a weak local housing market.

What if you're underwater?

If you have little or no equity - or are "underwater" on your mortgage, owing more than the property is worth - you're not completely out of luck. There are certain programs, most notably the federal Home Affordable Refinance Program, that are designed to help borrowers refinance when they have little or negative equity.

These can be very difficult to obtain, however - lenders still have the last word on whether to approve them - and are more likely to be successful for low-equity borrowers than those in negative equity. A mortgage broker or HUD-certified nonprofit housing counselor can provide further guidance in this area.

Figuring how much equity you have

So how do you know how much equity you have in your home, considering that national housing prices have fallen by about a third in the last five years? To find out for sure, you need to have an appraisal done - the lender will require it and you'll need to pay for it.

Before doing that, however, you can get a pretty good idea by researching sales prices in your own neighborhood. Don't just depend on online tools that generate an automatic estimate of home values for each house in your neighborhood - those can vary widely and some can be pretty far off the mark.

Compare values from other homes

Instead, use those same tools (Google "online appraisal tools") or the records from your community assessor's office (often available online) to identify three or four homes in your neighborhood or community that 1) sold recently in a conventional (non-distressed) sale; 2) are similar to yours in age, size and type; 3) if not in your immediate neighborhood, are in a neighborhood with similar home values to your own; and 4) had been previously sold around the same time you bought your home.

Compare what the homes sold for around the time you bought yours, to what they sold for most recently. If the differences are fairly consistent - say within 10-15 percent of each other - then that should give you a pretty good idea of how much your home value should be. If the differences vary quite a bit, keep comparing additional properties until a pattern emerges.

Deciding whether to proceed

This won't give you a precise value, but you should at least be able to decide if it's worth your while to go to the expense of getting an official appraisal. Unless you don't mind paying for two appraisals, it's best not to order one yourself, but wait for one to be generated as part of the loan application process - the new lending regulations don't allow your or your lender to select your own appraiser.

There's a good chance a professional appraiser will come in that's lower than your own calculations - they tend to be a bit conservative these days - so take that into account when preparing your own home value estimate. However, you should come away with a pretty good idea of whether you have a decent amount of home equity, borderline equity or negative equity - and proceed from there.

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