How much equity do you need to refinance?

Refinancing replaces your current mortgage with a new one, giving you a chance to get a lower interest rate or change your loan term.¹ But most lenders require homeowners to have a minimum amount of home equity to refinance. How much depends on what type of loan you're refinancing into, and whether you're taking cash out. Learning more about how much equity you need to refinance – and what you can do if you're short is among the top refinancing home mortgage tips.

Key takeaways:

• Most lenders require you to have a certain amount of home equity to refinance your mortgage.
• For conventional loans, the 80/20 rule is an industry standard that requires you to keep 20% equity in your home and avoid private mortgage insurance (PMI).
• While conventional cash-out refinances typically require you to leave 20% equity in the home, government-backed home loans can be more forgiving.

Home equity 101

Before you apply for a new mortgage, you may wonder, "How much equity do I need to refinance?" Home equity is the difference between what your home is worth and what you owe your lender. It represents how far along you are in paying off your mortgage debt, and what percentage of your home you own free and clear.

Equity serves as a proxy for risk for lenders. Generally, lenders look at loans on homes with significant equity as less risky. If you have a large personal stake in the property, you may be less likely to default. Lenders are less likely to work with homeowners who are overextending themselves financially.

The equity you start with equals your down payment. If you make a larger down payment, say 20%, you have that much equity to start with. If you put down the 3% minimum down payment on a fixed-rate conventional loan, you'd only have 3% equity to start with.

The primary way you build equity is by paying down your mortgage principal. As you owe less on your home, you'll have more equity. You also build equity when the fair market value of your home increases.

You can lose equity if the value of your home falls. If you owe your lender more than your home is worth, you're underwater on your mortgage – also known as negative equity. It's unlikely you'll be unable to refinance your mortgage in such a situation.

If you're unsure where you stand, you can use the Rocket Mortgage home equity calculator to estimate your equity.

Understanding the 80/20 rule

The 80/20 rule refers to your loan-to-value ratio (LTV) when refinancing. The rule is that you should keep at least 20% equity in your home, which means you can finance up to 80% of its value.

The 80/20 rule applies to conventional loans. While you can certainly refinance with an LTV higher than 80%, you must pay for private mortgage insurance (PMI) on conventional loans as long as you have less than 20% equity.

This is just a general rule. Your lender's refinancing requirements may vary.

While you may be able to refinance with less than 20% equity, you’re unlikely to get approved for a new loan if you have no equity or are underwater on your mortgage.

80/20 rule example

Let's look at an example of the 80/20 rule. If you bought a home for $420,000 with a 10% down payment and a 30-year fixed-rate mortgage of $378,000 at 6% interest.²

You would start out with 10% equity in the home. You would have to pay down your mortgage balance to $336,000 to have 20% equity in your home.

With a monthly payment of $2,266, it would take 89 payments, or 7 years and 5 months, to reduce your balance to $335,948. This assumes you make no extra payments, and the value of your home doesn't change. At that point, you'd have 20% equity and could ask your lender to cancel PMI payments.

After almost 12 years of owning the home, you've paid down your mortgage balance to $300,000. If your home is now worth $550,000, you'd have $250,000 in equity.

If your lender required you to keep 20% equity in your home to refinance, you would need to keep $110,000 in your home. That leaves you with $140,000 you could borrow with a cash-out refinance.

If you want to know where your property stands today, you can get a personalized report on your home value from our friends at Redfin.³

Equity requirements by loan type

The amount of equity you need to refinance depends on the type of loan you're using and whether you're taking cash out or doing a rate-and-term refinance.

Conventional loans

For a conventional loan, the 80/20 rule typically applies. If you have less than 20% equity, you may still be able to refinance to reduce your mortgage interest rate, but you'll have to pay for PMI.

There are standard requirements for a cash-out refinance, where you liquidate your equity. To mitigate lender risk, you generally must leave 20% equity in the home after refinancing.

FHA loans

If you’re looking to do an FHA rate-and-term refinance, only 2.25% equity is required.⁴ Otherwise, you need 20% equity to take cash out.

You’ll also need 20% equity to refinance from an FHA loan to a conventional loan without paying PMI.

FHA Streamline refinance allows you to refinance your current FHA loan for a new FHA loan. It requires less paperwork and can help you save on interest or change your loan term, though you can't take out any equity as cash.⁵

VA loans

Backed by the Department of Veterans Affairs, VA loans have more lenient equity requirements for refinancing.⁶ In fact, you may not need any equity at all, although lender requirements vary based on things like your credit score and debt-to-income ratio (DTI).

The two main options for VA loans are a VA cash-out refinance or a VA Interest Rate Reduction Refinance Loan (IRRRL).⁷ VA cash-out refinances are the only mortgages that allow you to borrow 100% of your home equity.

Similar to an FHA Streamline, an IRRRL or VA Streamline refinance allows you to refinance your current VA loan into a new VA loan to reduce your interest rate or change the loan term. It's a simplified process that requires less documentation and often requires no appraisal.

Alternatives to refinancing

If you want to borrow your equity but don't want to refinance your primary mortgage, consider a home equity loan or a home equity line of credit (HELOC). Rocket Mortgage currently doesn't offer HELOCs, but we want you to understand all your borrowing options.

Deciding whether a cash-out refinance or one of these alternatives makes sense often comes down to a blended rate calculation. A blended rate is the combined interest rate of your primary mortgage and your secondary financing, weighted by the loan balances of each.

The equation looks like this:

[(Primary Mortgage Balance x Primary Interest Rate) + (Second Mortgage Balance x Second Mortgage Interest Rate)] / Total Combined Loan Balance = Blended Rate

If the blended rate is lower than what you would receive by doing a cash-out refinance, taking the second mortgage option makes sense. Otherwise, a cash-out refinance will cost you less.

Navigating these numbers can be tricky, but a Home Loan Expert with Rocket Mortgage can help you determine the right move for your personal situation.

Home equity loan

A home equity loan is a second mortgage secured by your home equity.⁸ Instead of replacing your first loan, this is an additional loan. Funds are usually paid out in a lump sum. Rocket Mortgage offers this type of loan to qualifying homeowners.

HELOC

A HELOC is also a second mortgage, but it works like a line of credit. You have a draw period during which you can withdraw funds from the HELOC as needed up to the credit limit, which is secured by your equity. You only owe interest on what you draw out. After the draw period, the repayment period begins. You can no longer withdraw funds from the HELOC and start making payments on principal and interest until the balance is retired.

The bottom line: 20% equity opens up your refinancing options

Navigating your mortgage options is easier when you understand how your home's value affects your ability to get a new loan. While you can refinance with minimal equity, achieving 20% equity unlocks more financing options, allows you to avoid PMI, and lets you borrow your equity as cash.

When you're ready to adjust your mortgage terms or pull cash out, apply with Rocket Mortgage today.

¹ Refinancing may increase finance charges over the life of the loan.

² Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information, please refer to the official live rate information and product details published at RocketMortgage.com/mortgage-rates, where current pricing and various loan terms are made available.

³ Rocket Mortgage is an affiliate of Redfin. You aren't required to use its lending services. Learn more at redfin.com/afba.

⁴ Rocket Mortgage is not acting on behalf of FHA or HUD.

⁵ The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

⁶ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

⁷ The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

⁸ Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher-priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.

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