Do You Have Enough Home Equity in Your Home to Refinance?

Do you want to refinance your mortgage? Whether you want to lower your interest rate or get rid of mortgage insurance, you’ll likely need to have equity in your home to qualify for a mortgage refinance. The amount of equity in your home is one criteria lenders in Hawaii consider to help determine how much you can refinance and what type of loan terms you might be offered.

As a local bank in Hawaii, American Savings Bank wants to help you get a better understanding of the refinancing process and your refinance options. This guide will help you learn more about refinancing — including what it means to refinance a home loan — as well as some key factors to consider.

WHAT DOES IT MEAN TO REFINANCE A MORTGAGE?

Refinancing a mortgage is a term that describes the process of getting a new mortgage for your home. When you refinance, you don’t change the terms of your current mortgage. Instead, you take out a completely new home loan and use the proceeds to pay off your existing mortgage.

The steps to refinancing your mortgage are similar to the ones you take when taking out a mortgage. However, your lender will likely use the value of your home’s equity as part of the process to determine if you qualify for a loan and what the loan terms might be.

WHY REFINANCE YOUR HOME LOAN IN HAWAII?

Replacing your existing home loan with a new one through the refinance process can have a lot of benefits. Depending on your financial situation and the current mortgage market, a mortgage refinance might be your best option to:

• Lower Interest Rates: Consider refinancing if interest rates have are lower than when you took out your first mortgage. Refinancing to a lower interest rate lowers your interest costs over the life of the loan. The money you save from interest should be more than the cost of closing fees for your new loan.

• Get Rid of Mortgage Insurance: Homeowners with mortgage insurance, such as a Federal Housing Administration (FHA) borrower, can refinance to reduce or eliminate the cost of mortgage insurance. For example, if you have an FHA loan — which requires mortgage insurance — you could refinance to a conventional loan and potentially have the equity to eliminate any mortgage insurance on the loan.

• Reduce Monthly Payment: Refinancing your mortgage to a lower loan amount often means a lower monthly payment. The more equity you have in your home in Hawaii, the lower your refinanced loan will be. Ultimately, this means you have a chance to reduce your payment with a new loan.

• Shorten Your Loan Term: Do you have a 30-year term loan and want to shorten it? You could potentially refinance to a 15-year loan without too much change to your current monthly payment.

• Get Cash for Expenses: You can use a cash-out refinance to leverage the equity in your home for cash. To begin the process, you'll take out a new loan that’s more than the value of your current loan. Use the funds from the new loan to pay off your current loan and put the extra funds toward home projects, high-interest debt consolidation, and other financial needs.

WHAT IS A HOME’S EQUITY?

Your home’s equity is the amount of your home that you own. Generally speaking, to find how much equity you have in your home, simply subtract your remaining home loan balance from the current value of your home. For example, if you owe $100,000 on your mortgage and the current value of your home is $400,000, you would have about $300,000 in home equity ($400,000 - $100,000 = $300,000).

WHAT IS LOAN-TO-VALUE?

Your loan-to-value ratio (LTV) is how much you owe on your home loan compared to the value of your home. For example, if your home is worth $100,000 and you owe $60,000, your LTV is 60% ($60,000/$100,000 = 0.60 or 60%).

You can also use a mortgage calculator for a quick look at how much equity you can access based on the LTV. Your lender uses your LTV ratio to help decide if you’ll need mortgage insurance, what type of rate you’ll be offered, or if extra cautions need to be built into the loan terms.

HOW MUCH EQUITY DO YOU NEED TO REFINANCE A HOME IN HAWAII?

There are often different LTV and a home’s equity requirements depending on the type of mortgage you have. Some programs, such as FHA loans or VA loans, offer streamlined refinancing options to give borrowers more options to access loans. Common loans you can refinance include:

• Conventional Mortgage: In most cases, a lender wants you to have at least 20% equity (or an LTV of 80% or less) to refinance a conventional mortgage. You may still qualify for a conventional refinance with less home equity, but you’ll probably face higher interest rates and will most likely need to take out mortgage insurance.

• Home Equity Line of Credit: A Home Equity Line of Credit (HELOC), isn’t technically a refinance. You won’t take out a new mortgage to access your equity. Instead, your lender sets up a line of credit secured by your home, using the equity in your home. You can borrow against this credit line similar to how you use a credit card. You’ll have a credit limit and when you pay down your balance, you can access the full credit limit again.

• FHA Mortgage: Federal Housing Administration loans are typically designed for low- or moderate-income or first-time home buyers. The FHA offers a streamlined refinancing option for borrowers with an existing FHA loan, including no need for an appraisal. You may even be able to refinance through an FHA loan if your current LTV is above 100%, meaning you owe more than your home is worth.

• Jumbo Loan: Jumbo loans are those that exceed the maximum dollar amount for a conventional loan. It’s not uncommon for homes in Hawaii to require a jumbo loan, due to some of the highest home prices in the country. Like conventional loans, many lenders require your LTV to be below 80%, meaning you’ll likely need 20% equity to refinance.

• VA Loans: These loans are guaranteed by the U.S. Department of Veterans Affairs (VA) and have a streamlined refinance option for qualified homeowners in Hawaii. To refinance with a VA loan you’ll need to have an existing VA loan, which uses your entitlement benefits from the first loan to help you secure the second.

LEARN MORE ABOUT YOUR REFINANCING OPTIONS

There are a lot of reasons you might want to refinance your home in Hawaii. No matter your reason for refinancing, having an experienced local Hawaii lender can help make the process easier. The ASB home loan team is ready to look at your home’s value, equity, and current refinancing terms to give you your best options for a mortgage loan refinance.

Stop by one of our convenient branches or home loan centers to learn more about mortgage refinancing. Our knowledgeable home loan officers can assist you in evaluating your options so you can choose what’s right for your financial situation. Contact our mortgage loan team to set up an appointment today.

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Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion that it is appropriate for readers. The information that is contained in this material is general nature. Readers should seek professional advice for their respective situations.