How to Refinance a Mortgage With No Equity
Refinancing your home loan can be very beneficial for a lot of homeowners. You may want to lower your mortgage interest rate, or access cash for college tuition, home repairs, vacations, debt consolidation, etc. Another reason could be to shorten your loan term, from a 30-year fixed rate mortgage to a 15-year fixed rate mortgage.
No matter your primary reason, the refinancing process is generally pretty simple, but understanding all of your options can get tricky.
Mortgage refinance options
Before you apply, you should know that mortgage refinancing options are generally grouped into three categories: rate-and-term, limited cash-out, and cash-out refinances.
A rate-and-term refinance usually changes your mortgage rate, your loan term, or both. The refinance fees are normally paid with cash, or it can be paid using the low-closing cost refinance.
Limited cash-out refinance
Limited cash-out works very similar to the rate-and-term refinance, except the closing cost is added to your loan balance.
A cash-out refinance converts a portion of your equity into cash, that cash is then used to pay the closing costs.
Knowing your options is crucial in making the best decision for your future. Do your research with regard to mortgage lenders and make sure you look carefully through all fees and calculations. And if you have little to no home equity, fear not — it’s not impossible to refinance a mortgage. In fact, depending on when you got your mortgage and what type of mortgage you have, there may be multiple programs that can help you refinance.
Underwater mortgage? Try the Home Affordable Refinance Program (HARP)
HARP was designed for people whose home equity was negatively impacted by the market crash of 2008. If you took out a first mortgage before May 31, 2009, your loan was HARP-eligible. Many customers who bought houses in 2005 or 2006 with an 80% first mortgage and a 20% second mortgage found their home equity took a huge hit in 2008. Some saw their homes become underwater, or they owed more on their mortgage than their home was worth. They then had to refinance with low equity or may have refinanced without any equity. HARP allowed customers to refinance their loans and have access to better mortgage terms. Though HARP no longer exists, there are other options like HARP loans.
Little equity? Consider Federal Housing Administration (FHA) refinancing
You can refinance with an FHA loan even if you have little equity in your home. In fact, the FHA refinance process is streamlined. So, if you already have an FHA loan, you don’t have to have another appraisal. The FHA will value the house as it was valued from the previous mortgage. And in a lot of cases, depending on your credit score, you may not need credit to qualify. Under FHA, it’s a mortgage rating only, so you don’t have to prove your income or show any of your other bills. It does require that, within the last twelve months, there were no late mortgage payments and no bankruptcies in the last 2 years.
Veteran with zero equity? VA refinancing should be first loan choice
If your previous mortgage was a VA loan, you will also qualify for an Interest Rate Reduction Refinance Loan (IRRRL), or a VA streamline. In choosing the IRRRL option, you can reduce monthly payments via lowering your rate. Though the VA streamline has the fewest requirements, you cannot access cash. But, similar to an FHA refinance, a VA streamline is non-credit qualifying, so you don’t need to prove your income.
As long as your previous mortgage was a VA loan, and your last mortgage was done more than six months prior, you can refinance your mortgage without equity at any time. So if you’re VA eligible, VA refinancing is the easiest program to utilize and should be strongly considered.
Making a refinance work for you
If you’ve wanted to refinance your mortgage with little or no equity, talk to American Financing. We can work with you to identify your best options. And, we can help determine if now is the right time to refinance.