Do you lose home equity when you refinance your mortgage? (2024)

FAQs

Do you lose home equity when you refinance your mortgage? ›

The bottom line

“Using the cash out for home improvements is a more prudent use.” You have a greater risk of losing your home: A cash-out refinance increases your mortgage balance.

Refinancing can be a great way to get new mortgage rates and terms, as well as a one-time source of cash. If your current mortgage is satisfactory, home equity loans can be a less expensive option for consumers who need access to cash, while refinancing may be a way to lower monthly payments or save money on interest.

If you have little or no equity in your home, you'll 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.

Your home equity is the difference between your home's current value and your mortgage balance. If your home's value decreases, your equity can also drop, which can be problematic if you plan to sell or borrow against your home soon.

You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.

The line-of-credit arrangement also means you'll only pay interest on the amount you borrow, at least initially. With a home equity loan, you'll be responsible for interest on the entire loan balance, even if you don't use all the funds.

Refinancing the mortgage on your house means you're essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you're left with just one loan and one monthly payment.

A cash-out refinance is a type of mortgage refinance that takes advantage of the equity you've built over time and gives you cash in exchange for taking on a larger mortgage. In other words, with a cash-out refinance, you borrow more than you owe on your mortgage and pocket the difference.

What is the cheapest way to get equity out of your house? ›

A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home's equity.

Home equity requirements by loan type

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). This also helps you avoid private mortgage insurance payments on your new loan.

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.

Loan payment example: on a $50,000 loan for 120 months at 7.65% interest rate, monthly payments would be $597.43. Payment example does not include amounts for taxes and insurance premiums.

How to Get Equity out of a Home You've Paid Off. You own your home outright, so you have 100% equity. Most lenders allow you to borrow up to 80% to 85% of the equity in your home minus your mortgage loan balance. With a $0 mortgage balance, you could be eligible to borrow as much as 85% of your home's equity.

A home equity loan could be a good idea if you use the funds to make home improvements or consolidate debt with a lower interest rate. However, it is a bad idea if it will overburden your finances or only serve to shift debt around.

If you sell your home less than 6.75 years after you refinance, you lose money. This is why most lenders don't recommend refinancing if you plan to sell your home soon. Keep in mind that rules that apply to government mortgages may be more strict or outright prohibit you from refinancing before you sell your home.

Your Monthly Payment Could Increase

If you refinance from a 30-year mortgage to a 15-year mortgage, your payment will likely increase because you are shortening the amount of time you have to pay off your loan.

You can't get a lower interest rate: If your goal is to reduce your interest costs, right now isn't the best time to refinance. You're likely to end up with a higher rate, plus you'll need to cover closing costs on your new mortgage.