Do You Need a Down Payment to Refinance a Mortgage?

Refinancing your mortgage is akin to applying for a new home loan, with a significant difference: You typically don’t need to make a down payment. Lenders evaluate your creditworthiness but usually do not demand upfront cash from you.

However, refinancing does entail expenses, so you will likely need cash on hand when closing. The amount of cash required largely hinges on the type of refinance you opt for.

In most cases, refinancing your mortgage doesn’t require an upfront cash payment. In a typical rate-and-term refinance, aimed at lowering interest rates, reducing payments, or shortening the loan term, lenders typically seek an 80 percent loan-to-value ratio (LTV) or lower. Assuming your home’s value has appreciated since your initial purchase and your mortgage balance has decreased, meeting this LTV requirement should be straightforward. Your current equity stake essentially serves as your financial contribution to the transaction, replacing the down payment made when you first obtained your mortgage.

However, while refinancing without a down payment is common, lenders consider various factors before approving refinance applications. These include the amount of equity in your home, your credit score, and the history of your existing mortgage, such as timely payments without defaults or insufficient payments.

While lenders may not scrutinize the cash in your checking account for a down payment, they do place importance on another financial metric: your home equity.

Understanding Home Equity To calculate your home equity, consider this example: If your home is appraised at $400,000 and your outstanding mortgage balance is $300,000, your equity would amount to $100,000, representing 25% ownership of your home.

Equity Requirements for Refinancing The equity requirements can vary based on the type of refinance you’re interested in:

  • Conventional Refinances: For a rate-and-term refinance, as little as 3% equity may suffice. However, for a cash-out refinance, lenders typically prefer around 20% equity.
  • FHA Refinances: Cash-out refinances generally require a 20% equity position. Rate-and-term or streamlined refinance options may be available with as little as 2.25% equity.
  • VA Refinances: VA loan refinances allow borrowers to access up to 100% of their home’s value.
  • USDA Refinances: Specifically, the Streamlined Assist Refinance Loan through USDA may be available with no equity requirement (i.e., 0% equity).

Understanding these equity requirements can help you determine the type of refinance that best suits your financial situation and homeownership goals.

While a down payment isn’t required for refinancing, there are still associated costs to consider. Refinancing typically involves closing costs, which average around $5,000 according to Freddie Mac. These costs may include:

  • Appraisal fee
  • Loan origination fee
  • Credit report fee
  • Survey fee (if needed for property boundaries)
  • Discount points
  • Title search and insurance

These closing costs are generally paid at the closing table. Alternatively, you may have the option to roll them into the loan, which allows you to retain more cash on hand during the closing (details below).

Regardless of how you handle the costs, it’s important to calculate the break-even point to determine if refinancing is financially beneficial. You can use tools like Bankrate’s refinance calculator to estimate how many months it will take to recoup the closing costs through savings on your monthly payments. If you plan to sell your home soon or are nearing the end of your mortgage term, refinancing may not provide sufficient savings to justify the upfront costs.

A cash-in refinance is essentially the opposite of a cash-out refinance, where you replace your current mortgage with a larger one and receive the excess funds for immediate use. The key difference lies in how they affect your mortgage balance: while a cash-out refinance increases what you owe on your home, a cash-in refinance decreases the principal amount.

In a cash-in refinance, you contribute funds upfront, similar to a down payment when you originally bought the home. During the refinancing process, you make a lump sum payment toward the principal balance of your home loan. This payment reduces the total amount owed, resulting in a refinanced mortgage with a smaller principal balance.

This approach can be beneficial if you aim to lower your ongoing expenses. For example, a cash-in refinance can reduce your monthly payments even if you choose to shorten the loan term (typically, shorter terms mean higher monthly payments). It can also help secure a lower interest rate and potentially eliminate the need for private mortgage insurance (PMI) by improving your loan-to-value ratio (LTV).

This strategy is particularly advantageous if you’ve recently acquired a significant amount of money that you can allocate toward paying down a substantial portion of your mortgage, thereby significantly decreasing your overall debt burden.

Your lender may offer a no-closing-cost refinance option that allows you to roll your closing costs into the loan, sparing you upfront payments—but keep in mind, this doesn’t eliminate the costs. The drawback is that you’ll accrue interest on a higher loan amount, potentially costing you more over time. However, if finances are tight, this could be your best route.

Another approach is negotiating your closing costs. If you have a history with the lender or are considered a reliable client, you might persuade them to waive certain fees. If you’ve recently had an appraisal done, you may be able to skip another one, saving on that expense. Alternatively, you could opt for a less costly broker price opinion in place of a full appraisal.

To secure the lowest possible interest rate amidst current mortgage rate increases, follow these steps:

  • Improve your credit score: Make timely payments and lower your credit utilization to enhance your credit score. Review your credit report for errors and promptly correct any discrepancies.
  • Consider paying points: Depending on your situation, paying discount points may be beneficial. Each point typically lowers your mortgage rate by 0.25%. For example, paying one point on a $150,000 refinance could reduce the rate from 7% to 6.75%, costing $1,500 upfront.
  • Shop around: Comparing offers from multiple lenders is crucial for securing a competitive mortgage rate. Online platforms allow you to compare rates, terms, and customer reviews. Lenders may even match competitors’ offers to earn your business.

Despite rising rates, refinancing remains a viable option for many homeowners. Calculate your costs and assess factors such as how long you plan to stay in the home and the breakeven period to determine if refinancing is right for you.