The amount of home equity you need to refinance depends on the type of refinance, your loan program, the property and how you use the home. You may be able to complete a standard rate-and-term refinance with less than 20% equity, while a conventional cash-out refinance generally requires more.
Equity is only one part of refinance eligibility. Your credit, income, debts, mortgage payment history and property can also affect whether you qualify and what terms are available.
Refinance Equity Requirements
| Refinance Type |
General Equity Consideration |
| Conventional rate-and-term refinance |
Some one-unit primary-residence refinances allow loan-to-value ratios as high as 97%, which is equivalent to about 3% equity. Eligibility depends on the program and underwriting. |
| Conventional cash-out refinance |
A one-unit primary-residence refinance generally allows a maximum 80% loan-to-value ratio, leaving at least 20% equity. |
| FHA rate-and-term refinance |
The FHA permits higher loan-to-value ratios than 80% for eligible rate-and-term refinances. |
| FHA streamline refinance |
A new appraisal may not be required, so current equity may not be calculated in the same way as it is for a standard refinance. |
| VA IRRRL |
An appraisal is not universally required, although lenders may impose their own valuation or equity requirements. |
| USDA refinance |
USDA streamlined options may not require a new appraisal. A non-streamlined refinance is limited by the property’s appraised value. |
These are program-level guidelines rather than guarantees. Maximum loan-to-value ratios can change based on the number of units, occupancy type, loan structure, underwriting method and lender requirements.
What Is the Difference Between Equity and LTV?
Home equity is the difference between your home’s current value and the debt secured by it. Loan-to-value ratio, or LTV, expresses your mortgage balance as a percentage of the property value.
Suppose your home is worth $400,000 and you owe $300,000:
- Home value: $400,000
- Mortgage balance: $300,000
- Estimated equity: $100,000
- LTV ratio: 75%
- Equity percentage: 25%
The LTV calculation is:
Mortgage balance ÷ home value = LTV ratio
In this example:
$300,000 ÷ $400,000 = 75% LTV
Your equity percentage and LTV ratio generally add up to 100% when there is only one mortgage. A 75% LTV ratio means you have approximately 25% equity.
You can use our home equity calculator to estimate your current equity based on your property value and mortgage balance.
What Is Combined Loan-to-Value Ratio?
Combined loan-to-value ratio, or CLTV, includes the balances of multiple loans secured by the property. This can include a first mortgage, home equity loan or home equity line of credit.
Suppose your home is worth $400,000, your first mortgage balance is $280,000 and you owe $40,000 on a home equity loan:
($280,000 + $40,000) ÷ $400,000 = 80% CLTV
The lender may evaluate both LTV and CLTV when subordinate financing will remain open after the refinance.
You can use our CLTV calculator to estimate how your first mortgage and other home-secured debt compare with your property value.
Do You Need 20% Equity for a Rate-and-Term Refinance?
You do not necessarily need 20% equity for a rate-and-term refinance. A rate-and-term refinance replaces your existing mortgage to change the interest rate, repayment term or loan program without using the transaction primarily to withdraw equity.
Fannie Mae and Freddie Mac, the government-sponsored enterprises that support much of the conventional mortgage market, allow certain limited cash-out refinances above 80% LTV. Some eligible one-unit primary-residence loans can reach 97% LTV, which is approximately 3% equity.
The maximum available LTV depends on factors such as:
- Whether the home is your primary residence, second home or investment property
- The number of units
- Fixed or adjustable interest rate
- Credit profile
- Underwriting method
- Existing subordinate financing
- The specific conventional loan program
A higher permitted LTV does not mean every borrower will qualify at that level. Lenders may apply additional requirements, commonly called overlays, and the underwriting system may approve a lower maximum based on the full loan file.
Why Does 20% Equity Still Matter?
Although 20% equity is not always required, reaching that threshold can improve your options. A conventional loan at or below 80% LTV generally does not require borrower-paid private mortgage insurance, or PMI.
Refinancing may allow you to replace a mortgage that currently has mortgage insurance with a new conventional loan that does not require it. Whether that saves money depends on your interest rate, closing costs and the rules that apply to your current loan.
A refinance to remove PMI generally requires the new conventional loan to meet the lender’s LTV and underwriting requirements.
How Much Equity Do You Need for a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a larger loan and provides eligible proceeds from the difference. Because the new loan increases the debt secured by your property, cash-out refinances generally have lower maximum LTV ratios than rate-and-term refinances.
For a conventional cash-out refinance on a one-unit primary residence, the maximum LTV is generally 80%. That means you typically must retain at least 20% equity after the transaction.
For example, assume your home is worth $400,000:
- Maximum loan at 80% LTV: $320,000
- Current mortgage payoff: $250,000
- Difference before costs: $70,000
The full $70,000 would not necessarily be available as cash. Closing costs, prepaid expenses, other liens and the final payoff amount can reduce the proceeds.
Maximum cash-out LTV ratios may be lower for second homes, investment properties and properties with multiple units. Your available amount can also be limited by credit, debt-to-income ratio, loan limits and lender requirements.
Equity and Cash-Out Proceeds Are Not the Same
Having $150,000 in equity does not mean you can borrow the full $150,000. You must leave enough equity in the property to meet the program’s maximum LTV requirement.
If a home is worth $400,000 and the program limits the new loan to 80% LTV, the loan cannot generally exceed $320,000. Any mortgage payoff, closing costs and other financed amounts come out of that limit before cash is distributed.
You can use our cash-out refinance calculator to estimate how your home value, mortgage balance and maximum LTV could affect the amount available.
How Much Equity Do You Need by Loan Type?
Conventional Refinance
A conventional refinance can allow less than 20% equity for an eligible rate-and-term or limited cash-out transaction. Some one-unit primary-residence refinances permit LTV ratios up to 97%.
Conventional cash-out refinances generally require more equity. The standard maximum for a one-unit primary residence is typically 80% LTV, although lower limits apply to some other property and occupancy types.
Fannie Mae explains that a mortgage’s maximum LTV depends on the loan purpose, property type, number of units, occupancy and other loan characteristics.
FHA Refinance
An FHA loan can provide refinance options for borrowers with less than 20% equity.
For an FHA rate-and-term refinance with an appraisal, the maximum base mortgage is generally limited to 97.75% of the appraised value, subject to the FHA’s mortgage calculation and other requirements.
An FHA streamline refinance is available only when the existing mortgage is FHA-insured. The U.S. Department of Housing and Urban Development allows streamline refinances with or without an appraisal. When no appraisal is used, the loan amount is calculated under FHA streamline rules rather than from the home’s current market value.
An FHA cash-out refinance follows different rules and generally requires the borrower to retain more equity than an FHA rate-and-term or streamline refinance.
VA Refinance
A VA loan offers two primary refinance paths: the Interest Rate Reduction Refinance Loan and the VA-backed cash-out refinance.
The VA Interest Rate Reduction Refinance Loan, or IRRRL, is available for an existing VA-backed mortgage. A new appraisal is not required by the VA in every case, so current equity may not determine eligibility in the same way it would for a standard cash-out transaction. A lender may still require a valuation or impose its own LTV standard.
A VA-backed cash-out refinance can be used to refinance an existing VA or non-VA mortgage. The amount available depends on the property value, loan amount, VA entitlement, program requirements and lender limits.
USDA Refinance
A USDA loan can be refinanced through non-streamlined, streamlined and streamlined-assist options when the existing mortgage and borrower meet USDA Rural Development requirements.
USDA streamlined and streamlined-assist refinances may not require a new appraisal. The new loan is generally based on the eligible existing balance and permitted financed amounts rather than a new calculation of current equity.
A non-streamlined USDA refinance requires an appraisal, and the new loan amount is limited by the property’s appraised value. USDA guidance allows the LTV to exceed 100% only to the extent that the excess represents an eligible financed guarantee fee.
How Is Your Equity Determined During a Refinance?
The lender generally determines your equity using the property value accepted for underwriting and the balances of loans secured by the home.
The property value may come from:
- A traditional appraisal
- A desktop or hybrid appraisal
- An automated valuation method
- An appraisal waiver
- A program-specific calculation that does not require a new valuation
An online estimate can help you plan, but the lender’s accepted valuation controls the LTV used for the refinance.
What Happens If the Appraisal Is Lower Than Expected?
A lower appraisal increases the calculated LTV ratio. This can reduce your cash-out proceeds, add mortgage insurance, change the available pricing or make the proposed loan ineligible.
For example, a $300,000 loan would equal 75% LTV if the home is worth $400,000. If the appraisal comes in at $350,000, the same loan would equal about 85.7% LTV.
You may need to reduce the loan amount, bring money to closing, change refinance programs or wait until you have more equity.
What If You Do Not Have Enough Equity to Refinance?
Consider a Streamline Refinance
If your current mortgage is FHA-, VA- or USDA-backed, you may qualify for a streamline option that does not use a new appraisal or current market value in the same way as a standard refinance.
Streamline programs have their own payment-history, seasoning, net-benefit and loan-type requirements. They also generally do not allow unrestricted cash back.
Bring Cash to Closing
A cash-in refinance lets you pay down part of the balance at closing to reach the required LTV. This may expand your loan options or help you avoid mortgage insurance, but it reduces the cash you retain for emergencies and other needs.
Pay Down the Existing Mortgage
Additional principal payments can gradually lower your LTV if the property value remains stable. Confirm that the likely refinance benefit justifies using cash to reduce the balance.
Wait for More Equity
You can build equity by paying down principal or through an increase in the property’s market value. Appreciation is not guaranteed, and local home values can decline.
Choose a Smaller Cash-Out Amount
If a proposed cash-out loan exceeds the program’s maximum LTV, reducing the requested proceeds may bring the transaction within the limit.
Compare Other Home Equity Options
A home equity line of credit or home equity loan may allow you to keep the existing first mortgage instead of replacing it. These products have their own CLTV, credit, income and property requirements.
The differences between a HELOC and a cash-out refinance include whether the first mortgage is replaced, how the interest rate works and whether you borrow through a revolving line or receive a lump sum.
A home equity loan generally adds a fixed installment loan behind the existing first mortgage. A cash-out refinance and home equity loan can produce different costs depending on your current mortgage rate, the amount borrowed and how long you expect to carry the debt.
The Bottom Line
You do not always need 20% equity to refinance. Certain conventional rate-and-term refinances allow as little as about 3% equity, while FHA, VA and USDA streamline programs may not rely on a new appraisal or current equity calculation.
Equity requirements are generally stricter when you take cash out. A conventional cash-out refinance on a one-unit primary residence typically requires you to retain at least 20% equity. Property type, occupancy, credit, existing liens and lender requirements can lower the maximum available loan amount.
Frequently Asked Questions
Can You Refinance With Less Than 20% Equity?
Yes. Some conventional rate-and-term refinances permit LTV ratios above 80%, and certain government-backed streamline programs do not require a new appraisal. You may have fewer options or need mortgage insurance when your equity is below 20%.
Can You Refinance With 10% Equity?
You may qualify for a rate-and-term refinance with 10% equity, depending on the loan program, property and underwriting findings. A conventional cash-out refinance on a one-unit primary residence generally requires at least 20% equity to remain after closing.
Can You Refinance With 5% Equity?
Some conventional limited cash-out refinances allow up to 95% LTV, which is equivalent to about 5% equity. Certain eligible one-unit primary-residence transactions may allow up to 97% LTV. Approval depends on the complete loan file and program requirements.
Can You Refinance With No Equity?
A standard conventional refinance can be difficult when you have no equity. Some FHA, VA and USDA streamline programs may be available without a new appraisal or a traditional current-equity calculation, provided the existing mortgage and borrower meet the program requirements.
Is 20% Equity Required to Remove PMI?
For a new conventional refinance, an 80% or lower LTV ratio generally avoids borrower-paid private mortgage insurance. The lender’s accepted property value and final loan amount determine whether the new mortgage meets that threshold.
Does a Refinance Appraisal Determine Your Equity?
When an appraisal is required, the accepted appraised value is used to calculate the LTV ratio. Some refinances use an appraisal waiver, alternative valuation or program-specific calculation instead.
How Much Equity Can You Take Out?
The amount depends on the property value, mortgage payoff, closing costs and maximum LTV allowed by the loan program. For a conventional cash-out refinance on a one-unit primary residence, the new loan generally cannot exceed 80% of the accepted property value.
Does a Second Mortgage Affect Refinance Equity Requirements?
Yes. A home equity loan or HELOC can affect your combined loan-to-value ratio. The second lien may need to be paid off or subordinated to the new first mortgage, depending on the refinance structure and program requirements.
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