Question by Dark Magician: Why do you need equity in your home to refinance your mortgage?
I understand equity is value you have built up in your home by making loan payments but why is it required to refinance? Is it because lenders want to see you are in the process of paying off the loan instead of simply refinancing frequently?
Answer by dreamgirl
They want your new loan to be less than what the property is worth in case they have to repo it.
What do you think? Answer below!
You have to have some equity, how else will the closing costs be paid? If you have the cash on hand, fine, but most times that’s not the case.
Many lenders will not provide a refinance loan for more than 80% of the home’s value (called the loan-to-value ratio, or LTV), meaning that you would need to pay an additional 20% of the value of your home upfront to qualify for a refinance loan. The lender is protecting their own hide. Because if you default they could lose a lot of money. Most people who end up being foreclosed leave the house in a dump, plus add foreclosure costs and they’re out even more money. Which makes sense to me.
Since mortgage companies have been burned by people with little to no equity (they tend to walk away when the value drops a little), they aren’t willing to take that risk anymore.
In general, if you do not own at least 20% of the CURRENT value of your home you are not going to have an easy time of refinancing. You will probably pay PMI or not be able to complete your transaction.
This ensures that you have ‘skin in the game’ and that your personal money is on the line.