How Much Equity Do I Need to Refinance My Mortgage?

By refinancing, you can save money on your mortgage.

By refinancing, you can save money on your mortgage.

When interest rates drop, you can save money by refinancing your mortgage. In refinancing, you take out a new mortgage at current interest rates to pay off your old mortgage. This cuts the total cost of your mortgage and usually lowers your monthly payments. Just like your original mortgage, your lender wants you to have equity in your home -- value above what you owe on the mortgage.


Equity matters to lenders, the Lending Tree website states, because to acquire equity you have to put your own money into a property. If you have $50,000 in equity in a $300,000 house, for instance, that's a $50,000 investment you'll lose if your lender forecloses. That gives you a big incentive to keep up with the mortgage rather than lose your investment.


The guideline for mortgages and refinances, according to "USA Today," is that you should have at least 20 percent equity in the property. If you have less equity than that, you can still find lenders who will refinance your mortgage, provided your credit is outstanding, but you'll have to pay a higher interest rate. Your lender may also require you to take out mortgage insurance.


Sometimes owners who've been paying their mortgage faithfully wind up with no equity because their home's value has shrunk to less than they owe on the mortgage. In order to pay off the old mortgage, a lender would have to refinance for more than the house is worth. One possible way around this is to make a big enough payment on the mortgage that you regain equity and qualify for refinancing.


The Federal Housing Administration will insure home loans and refinances for qualified borrowers. If you can qualify for an FHA refinancing, you may need as little as 5 percent equity, because your lender knows that if you default, the FHA will cover its losses. Another source of government help is the Home Affordable Refinance Program: Even if your mortgage is as high as 125 percent of your home's value, the government will offer your lender financial incentives to refinance.


One option available if you have enough equity is the cash-out refinance, Lending Tree states. If you have a $300,000 mortgage on a $500,000 home, for example, you could refinance to a $400,000 mortgage and still have 20 percent equity; the $100,000 above your old mortgage could be used to consolidate debts or for any other purpose you choose.

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