Do You Need a Down Payment to Refinance Your Home?

Do You Need a Down Payment to Refinance a Home?

A down payment isn't required to refinance a mortgage. That's because during a refinance, you're not buying a new home. Rather, you're replacing your existing mortgage with a new one.

When you refinance, you'll go through a similar process to your initial mortgage application. The lender will review your credit score, mortgage payment history, income and employment background, plus the equity you've built in your home since first getting a mortgage. Your down payment won't play into the refinancing picture. But other factors will: You're more likely to get better terms on your new mortgage, for example, if your credit score has increased or your total debts have decreased.

How Much Equity Do You Need to Refinance?

Refinance lenders generally require that you have a certain amount of home equity. That's the proportion of your home's value that you own outright, as a result of the down payment and monthly mortgage payments you've made.

Here's the amount of home equity you need to refinance for some common loan types:

• Conventional refinance: Lenders may allow a conventional loan refinance with just 5% equity, but you'll pay private mortgage insurance if your equity is less than 20%. That means your best bet is often to wait to refinance a conventional loan until your equity reaches 20% or your home has an 80% loan-to-value ratio (LTV).
• FHA refinance: The Federal Housing Administration (FHA) has three refinancing programs for borrowers who have government-backed FHA loans, or who want to switch to an FHA loan: FHA streamline refinances, rate-and-term refinances and cash-out refinances. You can qualify for a streamline refinance after just six months of FHA mortgage payments. Rate-and-term refinances require you to have at least 3.5% equity in your home, while cash-out refinances require 20% equity.
• VA refinance: The Department of Veterans Affairs offers two refinance programs: an interest rate reduction refinance loan (IRRRL) for those with existing VA loans and a cash-out refinance loan for those with VA or non-VA loans. While the VA has no specific equity requirements for an IRRRL, in certain circumstances you must have at least 10% equity in your home to get a cash-out refinance. Individual VA lenders may also have their own requirements.

How Much Does It Cost to Refinance a Mortgage?

You don't need a down payment to refinance, but you will have to pay closing costs. These include:

• Appraisal fee: The lender will require your home to be appraised to assess its current value. This costs $300 to $1,000 on average.
• Loan origination fee: Lenders charge this upfront administrative fee, which typically costs 1% to 1.5% of the loan amount. An origination fee can include other fees, like underwriting fees, or the lender can itemize each charge.
• Credit report fee: You'll pay $10 to $100 per borrower for the lender to pull your credit report from the credit bureaus and get your credit scores.
• Title insurance: You'll pay $300 to $2,000 to title service providers who'll issue title insurance to the lender, protecting them if a previous owner or another party makes a legal claim against the home. You can choose to buy owner's title insurance for yourself, which will cost less than lender's title insurance—about $200.
• Taxes and insurance: You may need to prepay your first year of property taxes and homeowners insurance and place them into an escrow account at closing.
• Government recording costs: You'll pay $20 to $250, depending on where you live, for your local government to update their records confirming you own the property.

Do You Need a Down Payment for a Cash-In Refinance?

When you choose a cash-in refinance, you'll make a large payment toward your loan that lowers the amount you owe. While this isn't technically a down payment, it functions similarly.

You'll apply to refinance your mortgage, which will require many of the same steps as your original mortgage application, and you'll make one lump-sum payment during the process. That lowers the principal amount you borrow, reducing your monthly payments going forward and potentially qualifying you for a lower interest rate than you previously paid. (This will also depend on your credit score, income, equity and other factors.) Opting for a cash-in refinance can also help you bring down your LTV so you're able to qualify to refinance in the first place.

How to Avoid Paying Closing Costs on a Refinance

There's no way to completely avoid closing costs when you refinance. You can negotiate to pay less, or you can choose a refinance loan that restructures closing costs so there's less to pay up front. Here's how to limit your closing costs during a refinance:

• Compare multiple loan options. When you consider a refinance, get preapproved by a handful of lenders so that you can get the best deal possible. Look especially closely at the origination fee, and consider this and other closing costs when deciding which lender to go with.
• Negotiate with your lender. Ask the lender to reduce or get rid of certain closing costs. You can also reach out to your current mortgage lender and explain you're looking into refinancing. To keep you as a customer, they might consider making you an offer to refinance and giving you a break on certain fees.
• Roll closing costs into the loan or interest rate. Similar to no-closing-cost mortgages, no-closing-cost refinances either add closing costs to your loan or provide you with a lender credit to cover them, charging a higher interest rate in exchange. But in either case, you'll pay more per month and over the course of your loan. Check how much this would cost you before proceeding.

The Bottom Line

You don't need a down payment to refinance. But there are plenty of other charges and requirements to consider: closing costs, equity minimums and potentially a lump-sum payment if you opt for a cash-in refinance. When you refinance, your aim is to save money on interest and get better terms on a mortgage overall; make sure that you'll benefit from the refinance, and that paying your closing costs will be worth it, before you take the leap.