BankVibe.com reader Kendra emailed us this week and asked, “How much equity do I need in my home to refinance with today’s low interest rates?” We’ve seen many variations of this question pop-up as refinance rates sit at such attractive levels, so below is our break-down of what to expect and where to go for refinancing.
First, home equity can be gained in one of two ways – by paying down a principal, or through an increase in property value. You can also look at it as the principal amount paid plus (or minus) change in market value of a property. For example, when housing prices were soaring during the early 2000′s, one may have bought a $200,000 home with 20% down ($40,000) while making interest only payments each month. In this example, let’s say the home’s value rose to $220,000. He or she would then have a home equity of $60,000.
$40,000 (from 20 percent down payment) + $20,000 (increase in home value) = $60,000 in home equity
Conversely, if the home owner made this purchase during the housing collapse, the value of the home may have lost $20,000 rendering it’s value at $180,000. In this situation the home owner would have just $20,000 in home equity.
$40,000 (from 20 percent down payment) – $20,000 (decrease in home value) = $20,000 in home equity.
…So How Much Equity Do You Need to Refinance?
That depends on how much you would like to pay in fees and interest.
Lower rates will almost always accompany lower risk borrowers – so people with larger amounts of equity in their home will usually encounter lower fees and APR’s.
As a general rule of thumb, an LTV (loan to value ratio) of lower than 80 percent will usually constitute a low risk borrower. And consequently home owners looking to refinance with an LTV north of 80% will likely face higher fees.
The Loan-to-Value ratio shows the amount of a first mortgage lien as a percentage of the total appraised value of real property. So if a borrower borrows $160,000 to purchase a house worth $200,000, the LTV ratio is $160,000/$200,000 or 80 percent.
Refinancing an Underwater Mortgage:
Its no secret that the market has been flooded with bank owned properties largely stemming from underwater mortgages. And if you’re looking to refinance a home or property that is underwater you have two options involving government-run programs that are designed specifically to assist you.
The first is HARP – the federal Home Affordable Refinance Program. If you meet the criteria for HARP, you may be able to refinance your home for between 105% and 125% of it’s value. Getting into HARP requires that you are not heading towards foreclosure and that you haven’t made any delinquent mortgage payment within the last 12 months.
If you’re not eligible for HARP, your next move would be HAMP – the federal Home Affordable Modification Program. This program is designed for those that are underwater AND have missed mortgage payments within the last 12 months due to financial hardship. Its available through mortgage lenders but subsidized by the federal program. Be prepared to fully disclose and prove your hardship(s) for consideration.