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If you’ve noticed that the interest rate your bank is charging is not as good as another home loan you’ve seen advertised, or you simply want to check if you can save money on your home loan to make your day to day cashflow healthier, then you can investigate your options at any time.
Let’s start with a quick explanation of what equity is.
Equity is the amount of money you would have left over in your bank account if you were to sell your home today, after covering selling costs and paying the bank back what you owe on your home loan. It has nothing to do with what you paid for it originally, just the difference between what you owe and the present value, minus the costs of selling it.
So, for example, if your home is mortgaged and you owed the bank $350,000 for it, but it sold for $450,000, then your equity would be $100,000 minus the total selling costs. Don’t forget to calculate the selling costs before you celebrate, think real estate agent fees + marketing costs + lender fees + any other settlement costs including conveyancing services.
It’s always a good idea to know your current financial position with your home loan, knowing roughly what you’d be left with if you had to sell up.
What is your home worth now?
Not sure what your property is worth in today's market? You can get a quick estimate from your real estate agent in an appraisal, or do your own research to gauge the market (or present) value of your home to get an idea of what your sale might look like if you were to sell your home in the current real estate market. Don’t guess it on your own, unless you have reliable evidence to support it because people tend to overestimate the worth of their home and can be surprised or disappointed unnecessarily.
So, how much equity do I need to have before it’s worth refinancing?
Well, the answer is that’s completely up to you. But I would advise you to have at least 20% equity in your home to avoid having to pay Lenders Mortgage Insurance (LMI) on the new loan. In some cases, LMI is very expensive, so it's a cost worth considering and eliminatingif you can.
Please speak with your mortgage broker to see if they can find other home loans on your behalf before you have an extra credit check added to your financial history.
We’ve got less than 20% equity, how can I increase my equity?
The best ways you to bump up your equity value is by paying a little bit more off your home loan over time, or making some home improvements to grow the value of your home over time, so that when you get to that 20% plus equity position you could comfortable look at refinancing without the extra LMI cost involved.
The exception to waiting until you have more than 20% equity is where a home was purchased through a state government lender first home initiative. The interest rate on those products is usually higher than the mainstream lenders, so while the equity value might not have grown to 20% yet, it could still be worth moving to a traditional lender’s home loan product and wearing the cost of the LMI because of the saving on interest over time. It’s a situation I can provide you with information on and help you weigh up your options.
If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email [emailprotected] or send us a message via our website for a quick response.
Bob Malpass 0431 862 136 or [emailprotected]
Thanks for reading,
Bob
Disclaimer
The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If any products are detailed on this website, you should obtain a Product Disclosure Statement relating to the products and consider its contents before making any decisions. Where quoted, past performance is not indicative of future performance.
Malpass Finance Pty Ltd disclaim all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice on this site. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information on this website is no substitute for qualified financial advice.
FAQs
Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent).
Can I refinance if I don't have 20% equity? ›
How much equity do I need to refinance a conventional loan? Conventional wisdom says you'll need a minimum credit score of 620 and 20% equity to refinance with a conventional loan, but in fact, you'll only need 20 percent if you want to avoid private mortgage insurance or plan to do a cash-out refinance.
What is the minimum amount to refinance a mortgage? ›
A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you'll likely need 20% equity in your home. This number is often the amount of equity you'll need if you want to do a cash-out refinance, too.
Can you refinance with low equity? ›
If you have little or no equity in your home, you will only be able to refinance through certain lenders or refi programs. You could impact your credit. The mortgage application process often involves hard inquiries, which can temporarily lower your credit score.
What is the minimum equity for a cash-out refinance? ›
You'll usually need at least 20% equity in your home to qualify for a cash-out refinance. In other words, you'll need to have paid off at least 20% of the current appraised value of the house.
Does refinancing hurt your credit? ›
Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those. Your score will typically dip a few points, but it can bounce back within a few months.
What is the 80/20 rule in refinancing? ›
The LTV limit (known as the loan-to-value ratio limit) for a single-family property is 80%. That means you need to keep a minimum of 20% equity in your home when you do a cash-out refinance.
How do I know if I have enough equity to refinance? ›
The 20 Percent Equity Rule
When it comes to refinancing, a general rule of thumb is that you should have at least a 20 percent equity in the property. However, if your equity is less than 20 percent, and if you have a good credit rating, you may be able to refinance anyway.
Do I need another down payment to refinance? ›
You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.
How much would a $50,000 mortgage cost per month? ›
Term length
| Mortgage Amount | Term Length | Monthly Repayments |
|---|
| £50k | 25 years | £278 |
| £50k | 30 years | £253 |
| £50k | 35 years | £237 |
| £50k | 40 years | £225 |
3 more rowsFeb 12, 2024
Credit score for conventional refinance
Conventional refinancing is one of the most common types. You'll need at least a 620 credit score to refinance your conventional loan (or into a conventional loan) — though at that score, you'll likely need a DTI ratio of 36 percent or less, which can be limiting.
What qualifies you to refinance your home? ›
Generally, you will need at least 20% equity in your home to qualify for a refinance. Having higher equity can give you access to more favorable interest rates and loan terms. However, there are loan programs available for borrowers with less equity.
Can I use my equity to lower my mortgage payment? ›
If you have built up equity in your home but still have a mortgage balance to pay off, you may consider using a home equity line of credit (HELOC) to reduce your monthly payments and the overall interest you pay on your loan.
Is it easier to get a home equity loan than refinance? ›
A home equity loan is easier to obtain for borrowers with a low credit score and can release just as much equity as a cash-out refinance. The cost of home equity loans tends to be lower than cash-out refinancing and can be far less complex. Home equity loans also have drawbacks, though.
What happens if the value of your house goes down? ›
And if prices fall, you could lose some home equity, which is the difference between what you owe on your home and what it's now worth. But that's not necessarily cause for immediate concern, unless you need to tap into your home equity or plan to sell your home in the near future.
Can you get a HELOC without 20 equity? ›
Most lenders require you to have at least 15% to 20% equity in your home to take out a home equity loan or HELOC. If you made a 20% down payment when you purchased your property, you'll have already met the requirement to borrow against your equity.
Do you need 20 equity for a HELOC? ›
How Much Equity Is Needed For a HELOC? Most lenders require that you have at least a 15 to 20 percent equity stake in your home. This is calculated by finding your loan-to-value ratio (LTV).
Can you refinance 100% of home value? ›
Cash-out refinance vs.
One advantage of HELOCs is that most HELOC lenders allow you to borrow up to 85% of your home's value. Some HELOC lenders will even lend up to 100% — much more than the 80% cap on most cash-out refinances.
Do I have 20 equity in my home? ›
You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value. This includes your primary mortgage as well as any home equity loans or unpaid balances on home equity lines of credit.
