Can You Refinance With Little Equity in Your Home?
- The reason refinancing is difficult when you have little equity in your home is because of its importance to your lender. If you default on the loan, your lender must be able to recoup his investment, something he cannot accomplish if the value of your home is less than the loan amount. In a traditional refinance, lenders set a value for your home by requesting an appraisal. Comparing this appraisal to the payoff on your existing loan establishes the amount of equity you have in the home. When you buy a home with a low, or no, down payment, or if economic conditions result in a decline in property values, meeting the equity requirement can be difficult.
- Available FHA options depend on whether you have little or no equity in your home. Whether or not you already have an FHA mortgage, you can still apply for an FHA refinance loan. The FHA offers two types of refinance loans that may be appropriate for your situation. The first, a traditional rate and term refinancing option, requires at least 3.5 percent home equity to qualify. The second program, Streamline Refinance, requires only that your current mortgage does not exceed the value of your home.
- If you already have a VA-insured loan and your current mortgage does not exceed the value of your home, you may qualify for an Interest Rate Reduction Refinance loan. If you choose this option, you may be able to include closing costs in the refinance loan. In addition, you can add up to $6,000 to your loan amount for energy efficient home improvements, even if this results in a loan amount greater than the current value of your home.
- If your current mortgage is with Fannie Mae or Freddie Mac and you apply on or before June 30, 2011, you may qualify for a refinance loan through the HARP program. This is a government refinance program specifically for homeowners with negative home equity, allowing you to refinance up to 125 percent of the value of your home. Freddie Mac offers a choice of two programs, Relief Refinance Mortgage-Same Servicer and Relief Refinance Mortgage-Open Access, differing only in regard whether you want to continue working with your original lender or choose a new lender.
