What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

How to Calculate the Equity Required to Refinance

Original post by Mark Kennan of Demand Media

A refinance may save you money, but only if you have enough equity to be approved.

Refinancing your mortgage when interest rates fall can help you reduce your monthly mortgage payments, and lock in a low rate for the rest of the mortgage. However, if you did not put down a large down payment, or your home has declined in value, lenders may not allow you to refinance. Knowing how close you are to attaining the equity you need in your home helps you figure out if you can afford a few thousand extra dollars to save even more with a refinance, or if you are simply too far away for refinancing to be an option.

Step 1

Ask your lender the maximum loan-to-value ratio needed so it will consider allowing you to refinance. Many lenders prefer to see a loan-to-value ratio of at most 80 percent, but may allow you to refinance with less if you pay for private mortgage insurance.

Step 2

Subtract the required maximum loan-to-value ratio from 100 to calculate the percent equity needed in your home to refinance. For example, if a lender will let you refinance if you have a 90 percent loan-to-value ratio as long as you pay for private mortgage insurance, subtract 90 from 100 to find that you need 10 percent equity in your home.

Step 3

Estimate the value of your home. You can use real estate tax assessments, Internet databases of home prices, and recent sales of comparable properties in your area. If possible, ask your lender what it uses to appraise homes so you can use a similar data source.

Step 4

Multiply the percentage of equity required to refinance by the estimated value of your home to find the dollar amount of equity you need in your home to refinance. Finishing the example, if your home is worth $192,000 and you need 10 percent equity, multiply $192,000 by 0.1 to get $19,200 of equity needed in your home.



About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

Photo Credits

  • Brand X Pictures/Brand X Pictures/Getty Images