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Whether you’re looking to lower your monthly mortgage payment, lock in a better interest rate, or tap into your home’s value for cash, there’s one number that matters most: your home equity.
Home equity represents how much of your home you actually own—and it’s one of the most important factors lenders use to determine your refinance eligibility, interest rate, and whether you’ll need to pay private mortgage insurance (PMI). The more equity you’ve built, the more refinancing options you may have.
But in today’s housing market—where interest rates remain elevated, home values have fluctuated since their COVID-19 pandemic peak, and affordability is tight—understanding your equity position is more important than ever.
What is home equity?
Home equity simply refers to the difference between the value of your home and the remaining balance on your mortgage or mortgages. Naturally, since home values fluctuate, your home equity changes according to the appraised value of your home. In addition, as you make mortgage payments and pay off your loan, you increase your equity.
For example, if your home value is currently $200,000 and you have paid off $20,000, you have 10% in home equity.
To calculate your home equity, use this equation: (paid off amount ÷ current home value) x 100 = equity.
Why home equity matters
Home equity is a powerful financial asset and, in many cases, it’s the greatest driver of wealth for Americans.
It can help you qualify for refinancing, lower your mortgage interest rate, eliminate the need for PMI, or be used for future investments like college tuition or retirement. If you sell your home, your equity could be used to pay your closing costs, and any leftover after paying off your mortgage is money you can pocket as profit.
How equity affects your loan terms
Your loan-to-value ratio (LTV) is a key refinancing metric, and it’s directly influenced by your home equity. The more equity you have, the lower your LTV, which can lead to:
- Lower interest rates
- Reduced or eliminated PMI
- Better refinancing terms
PMI is typically required for all conventional loans with less than a 20% down payment (which is another way of saying less than 20% in equity). The amount you pay in PMI varies according to how much equity you have, so the higher your equity, the lower your PMI premiums will be.
And once you reach 20% or more in home equity, you can work with your lender to drop the policy altogether, bringing down your monthly mortgage payments.
How much home equity do you need to refinance?
Your options for refinancing depend on your credit profile as well as your home value, which is based on your local market. If you’re thinking about refinancing, you should use a refinance calculator to determine if it’s the right time for you.
Most conventional lenders require at least 10% home equity for a refinance. If you have less than 20% in home equity, you will have to pay PMI, which will add to your monthly payments. However, if you are already paying PMI, or if your interest rate is higher than today’s mortgage rates, a refinance may still make sense.
If you are interested in refinancing, you will need to have an estimate of your home value before you apply—and, in most instances (although not always required), an appraisal as well. A Realtor® can give you an idea of how much your home is worth based on recent sales of comparable homes.
Can you refinance with low home equity?
Even if your home equity is under 20%, there are options. It’s a good idea to look into federal government lending agencies who will offer you financing even if you have low equity.
You can refinance with a Federal Housing Administration (FHA) loan with just 3.5% in home equity, but be aware that you will need to pay mortgage insurance with all FHA loans. Most FHA insurance must be paid for the entire loan term.
Veterans Affairs loans and US Department of Agriculture loans are also popular financing options backed by the government.
The best way to find out if you qualify for a refinance is to have a free consultation with a reputable lender like a bank or a mortgage company.
How To Estimate Your Home Equity Before Refinancing
Before applying for a refinance, get a solid estimate of your current equity:
- Check recent sales of similar homes in your neighborhood.
- Use online tools to estimate your home’s value.
- Speak with a local real estate agent for a comparative market analysis (CMA).
- Be prepared to order an appraisal as part of the refinancing process.
Understanding and tracking your home equity is one of the smartest moves you can make as a homeowner. Whether you’re refinancing to save money or tapping into your home’s value, the amount of equity you’ve built will guide what options are available and how favorable your terms will be.
Allaire Conte contributed to this article.