How Does The Amount of Equity in My Home Affect My Mortgage Interest Rate?

Learn how much your mortgage rate changes based on the amount of equity you have in your home

How much equity you have in your home, combined with your credit score, are the two main factors that determine whether or not you will get the best interest rate available. Credit scores are covered in another article "What Credit Scores Get The Lowest Mortgage Rates." The general rule for equity is that the more equity you have in your home when you refinance, the better your interest rate will be, and the lower your mortgage payment will be.

The percentage of a home's value that a mortgage lender will lend on is called the loan-to-value ratio, or LTV. All mortgage lenders have tightened guidelines for how much they will lend on a property's value over the past 24 months. Today, while homeowners can still refinance up to 95% of the value of their home, the rates and mortgage insurance costs for loans with LTVs over 80% have dramatically increased for all loan programs except for the FHA program.

Borrowers with credit scores below 700 will not get the best mortgage rates if their LTV is between 70% and 80%. They will pay about 1/8% to 1/4% higher in rate than for the lowest mortgage rates available. Between 60% and 70% LTV borrowers may or may not see a slightly higher rate depending on the loan program. Below 60% LTV there are no add-ons to the interest rate.

Borrowers with credit scores over 700 can actually get the best interest rates if their LTV is 60% or below, often saving 1/8% off the otherwise lowest mortgage rates.

These pricing adjustments apply primarily to standard fixed rate mortgage loans from Fannie Mae and Freddie Mac and include the new expanded high-balance jumbo programs from both agencies. Jumbo mortgage refinance loans are currently offered from a small number of secondary market institutions and their guidelines are different for each loan program.

These rules are more restrictive for borrowers seeking a cash out refinance, with rates anywhere from 1/8% to 3/4% higher and the maximum LTV often lower.

Another factor to take into consideration is whether or not you have a second mortgage or home equity line that you will keep in place after you close your loan. This subordinate financing could reduce the maximum LTV allowed on your first mortgage or it could cause your rate to be higher. For example, if you have one first mortgage for $160,000 on a home worth $200,000 (80% LTV), you will get a lower rate than if you also have a second mortgage for $20,000.

For borrowers with less than 20% equity in their homes right now, options are limited but the new government HARP program could provide some relief. If your loan is owned by Fannie Mae or Freddie Mac, then you may be able to refinance your loan even if you have no equity (possible up to 125% of the value of your home) and not have to obtain mortgage insurance if you do not have it now.

Your Total Mortgage loan officer can help provide you with guidance as to the best mortgage programs available based on the amount of equity you currently have (or don't have) in your home right now.

To find out the best mortgage rate you can get right now, please email us or call us at 1-877-868-2503.

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

Our visitors also found the following articles relevent to this topic:

• Mortgage Refinancing FAQs
• Refinance Mortgage Loan
• Four Common Types of Refinance Mortgages