Many homeowners assume they need 20% equity to refinance, but that's not universally true. While 20% equity opens up the most options and typically the best pricing, a variety of refinance programs are available to homeowners with less equity — sometimes even homeowners who owe more than their home is currently worth. Understanding loan-to-value requirements and how they interact with mortgage insurance can clarify what's realistically available.
What Loan-to-Value Means for Refinancing
Loan-to-value (LTV) is the loan amount divided by the home's appraised value, expressed as a percentage. A home worth $300,000 with a $270,000 mortgage balance has an LTV of 90%, meaning the homeowner has 10% equity. Lenders and loan programs set maximum LTV limits for refinancing, and those limits vary significantly by loan type and refinance purpose.
Understanding how to calculate home equity is a useful first step before exploring refinance options, since it establishes the LTV a homeowner is starting from.
Conventional Refinance With Limited Equity
For a rate-and-term refinance on a conventional loan, many lenders allow LTVs up to around 95% to 97% for certain borrower and property profiles, though requirements vary by lender and loan program. Above 80% LTV, however, private mortgage insurance is typically required on the new loan, similar to a purchase mortgage. This means a homeowner refinancing with less than 20% equity may end up paying PMI on the new loan even if they didn't have PMI before, or may see their existing PMI continue rather than being eliminated.
For a cash-out refinance, maximum LTV limits are generally lower than for a rate-and-term refinance — often in the 80% range or below for conventional loans — since cash-out refinancing increases the loan balance and reduces the homeowner's equity cushion.
FHA Refinancing With Limited Equity
FHA loans generally allow higher LTV refinancing than conventional loans. An FHA streamline refinance is designed specifically for homeowners who already have an FHA loan and want to lower their rate, often without a new appraisal or with more flexible equity requirements than a standard refinance. FHA cash-out refinances have their own separate LTV limits, generally lower than the limits for a non-cash-out FHA refinance. FHA loans require ongoing mortgage insurance premiums regardless of equity level in many cases, which differs from how PMI works on conventional loans. Specific current limits are set by HUD and should be confirmed with a HUD-approved counselor or FHA-approved lender.
VA Refinancing With Limited Equity
The VA offers two primary refinance paths for eligible veterans and service members. The VA Interest Rate Reduction Refinance Loan (IRRRL), a type of streamline refinance, is designed to lower the rate on an existing VA loan and often has more flexible equity requirements since it doesn't always require a new appraisal. VA cash-out refinances have their own LTV guidelines set by the VA, which can allow refinancing at higher LTVs than many conventional cash-out programs, subject to the VA's specific eligibility rules. Because VA loan benefits and requirements are set by the Department of Veterans Affairs, eligibility and current limits should be confirmed directly with the VA or a VA-approved lender.
USDA Refinancing With Limited Equity
USDA loans, available for eligible rural properties, offer streamlined and non-streamlined refinance options that in many cases do not require a new appraisal, meaning equity position may matter less than it would for a conventional refinance. USDA refinance programs and eligibility are set by the U.S. Department of Agriculture and should be confirmed with the USDA or an approved lender.
Underwater Refinancing
In cases where a homeowner owes more than the home is worth (negative equity), refinancing options become much more limited, and in many cases the standard programs described above won't be available since LTV would exceed program maximums. Historically, government-sponsored refinance programs have occasionally been introduced during periods of widespread negative equity to help underwater borrowers refinance, though availability of any such program changes over time and isn't guaranteed to exist at any given moment. Homeowners in this situation should check directly with their loan servicer or a HUD-approved counselor about what current options, if any, might apply to their specific loan type.
Weighing the Tradeoffs of Refinancing With Less Equity
Refinancing with limited equity often comes with tradeoffs worth considering:
- Mortgage insurance costs may apply or continue, adding to the monthly payment even if the interest rate itself is lower.
- Rate pricing on conventional loans is often tiered by LTV, meaning a refinance at 90% LTV may come with a higher rate than the same loan at 75% LTV.
- Loan program limits mean that not every refinance goal (such as a large cash-out amount) may be achievable with limited equity, even if a rate-and-term refinance is possible.
Running the Numbers
Because mortgage insurance and rate pricing can offset some of the benefit of a lower rate, it's worth using a mortgage payment calculator to model the full new payment, including any mortgage insurance, and comparing it against a refinance break-even calculator to see how long it would take to recoup any closing costs given the new payment. Speaking with a licensed lender about the specific LTV limits for a given loan program is the most reliable way to know what's realistically available with less than 20% equity.