Home refinance is a smart way to reduce mortgage payments or pay off debts. However, you need to have solid home equity for refinancing. Why? Because this affects the amounts you can refinance and the interest rates that you will be offered. Many people don’t have an idea of how much equity they need. The following are some general guidelines.
The first thing you need to know is what equity is. Equity is simply the portion of your home that you own. It is the total amount you will receive once you sell your house minus the mortgage. For instance, if your home is worth $250,000 and your mortgage is $125,000, then you have 50% equity. The rule of thumb is the higher the equity, the easier it is to get your loan.
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If your credit score is low or your home equity isn’t great, try refinancing your mortgage through the Federal Housing Administration.
1. The 20% Rule
Another general rule of thumb is that you should at least have 20% equity of your home or property. Lower home equity could still get you your refinance, but you would need to have an amazing credit rating. The only catch is that the lender may charge you with a higher interest rate or worse, take out ask you to take out mortgage insurance.
2. Transunion Report and Score
If your loan-to-value ratio meets the requirement, lenders will approve your home equity or at least take it under consideration. If LTV is what the lender is focused on, simply have it ready by dividing your home mortgage by your home’s value. For example, a $50,000 home with a $10,000 mortgage has an LTV of 25%. The lower the LTV, the higher your home equity will be, hence, the higher your chances of refinancing approval.
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3. Refinancing With Mortgage Insurance
As mentioned above, if your home equity is under 20%, mortgage insurance is mandatory to protect the lender in case the homeowner can’t pay loan payments. The homeowner can pay in monthly installments, or if his budget permits it, upfront.
4. Refinancing With the FHA
The Federal Housing Administration is where homeowners go to for refinancing when they have a small amount of home equity or low credit score. With the government’s support, the lenders approve the loans with interest rates that might look attractive but are not flexible. These rates may also vary from county to county.
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Lenders would require an appraisal of your property’s value before they look at your refinancing eligibility. The appraisal simply tells you the probable buying price for the property, if it were to be sold. If you are refinancing through the FHA, an appraisal also checks the health and safety of the home such as roof and ventilation.