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

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.

Although a cash-out refinance can be a convenient way to access large sums of money to pay debts or make renovations, it carries risks such as potentially higher interest rates and the danger of losing the home to foreclosure.

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

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.

The bottom line

Refinancing doesn't have to affect your home's equity -- but your home's appraisal value and the cost of refinancing can.

Reduce your monthly payment.

Often, refinancing your home equity loan will result in having to pay less each month. This happens in one of two ways: You score a better (i.e., lower) interest rate on the new loan, or the new loan has a longer term.

Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.

If you're eager to refinance to get a better rate, you may want to wait. Mortgage rates are expected to continue dropping into 2024, according to Fannie Mae, hitting an average of 6.8% by the fourth quarter and even more in 2025.

Moving into a longer-term loan: If you're already at least halfway through the loan term, it's unlikely you'll save money refinancing. You've already reached the point where more of your payment is going to loan principal than interest; refinancing now means you'll restart the clock and pay more toward interest again.

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.

In most cases, you may refinance a conventional loan as soon as you want. You might have to wait six months before you can refinance with the same lender. But that doesn't stop you from refinancing with a different lender.

Once you refinance, it's like you're starting over. Say you've been paying off your old mortgage for 10 years, and you have 20 years to go. If you refinance into a new 30-year mortgage, you're now starting at 30 years again.

You can sell your house right after refinancing — unless you have an owner-occupancy clause in your new mortgage contract. An owner-occupancy clause can require you to live in your house for 6-12 months before you sell it or rent it out.

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).

Do all home equity loans require an appraisal? Yes. Lenders require an appraisal for home equity loans—no matter the type—to protect themselves from the risk of default. If a borrower can't make monthly payments over the long-term, the lender wants to know it can recoup the cost of the loan.

A cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash.

It depends on how much equity you have and your lender. Regardless, though, you can't take out the full amount of equity — so if you have $100,000 in equity, say, you can't simply access $100,000. Most lenders allow you to borrow 80 percent to 85 percent of your home's appraised value.