Recent decreases in home values have left many homeowners unable to take advantage of refinance opportunities. But even with low home equity, you may still be able to refinance your mortgage. Many lenders are willing to approve a home refinance of up to 90% or sometimes even 95% of your home value.
When gathering refinancing information, one of the first steps you should take is to get an estimate of your current home value. Most lenders require an appraisal, but you can get an idea of your home value before applying for a home loan by asking a real estate agent or using an online home value estimating calculator.
Options for Low Equity Home Refinancing
Even if you owe more on your mortgage loans than your home is worth, you may still be able to refinance via the government program HARP (Home Affordable Refinance Program).
Another option for some homeowners is an FHA-insured refinance, available to homeowners with as little as 3% equity in the home. FHA loans do require mortgage insurance in both an upfront payment and a monthly installment, but you still may find that refinancing your home is worth it if you can significantly lower your mortgage interest rate.
Things to Consider with a Low Equity Refinance
Conventional lenders charge private mortgage insurance (PMI) on mortgage loans for homeowners with less than 20% equity or who make less than a 20% down payment. You can ask a lender to calculate the additional cost of PMI to see if it still makes sense to refinance.
While many homeowners opt to roll the closing costs for a home refinance into the new home loan, if you have limited equity in the home, it may not be possible to simply wrap the costs into the principal. Consult with a lender to see if there are other options for paying for closing costs. Some lenders allow you to pay the closing costs by charging a slightly higher interest rate.
If you have low equity and a high interest rate, you might want to consider paying some cash at settlement in order to meet the lender guidelines on how much you can borrow. In the long run, you can often still save money on your mortgage even if you pay cash for closing costs and to pay down a little of your principal.