- During the refinancing process, the term "loan-to-value ratio" may come up. This is a ratio used to compare the value of the house to the amount of the loan. All lenders have a specific loan-to-value ratio that they offer with their lending programs. Lenders may use a ratio of 80 or 90 percent. Some programs offer 125 percent financing, which could allow you to borrow more than the current value of your home.
- To refinance your mortgage without equity, you generally must have a very high credit score. When a lender allows 100 percent or more financing, they put themselves in a risky position. If you cannot afford to make your loan payments and they foreclose, they would potentially lose money on the deal. This means most lenders would only be willing to work with you if you have an exceptional credit history.
- The major benefit of refinancing your loan is to take advantage of a lower payment. If interest rates in the market are considerably lower than when you originally financed your home, you could save hundreds of dollars per month. This could help you stay in your home if you are having trouble making the monthly payments. When property values decline, it can make it difficult if you have money troubles, and this type of loan could be a way out.
- Even if you find a lender willing to refinance your home, it might not be in your best interest. When you refinance a loan for the entire value of the house, this does not leave you with any room to work. This means that if you need to move for some reason, you might not be able to sell your house. There also can be considerable closing costs for a refinance.
- Consider getting help from government programs. For example, the government has a program called the Home Affordable Refinance Program. This program allows homeowners to refinance certain loans even if the new loan would be up to 125 percent of the value of the house. To qualify, you must be current on your mortgage and have a Freddie Mac or Fannie Mae mortgage loan.
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