You'll Need More Equity to Refinance a Conventional Loan.

Conventional loans require a down payment when you are purchasing a home, but for a refinance, still more equity is needed—a minimum of 10 percent. This means that if you put 5 percent down to buy a home and you want to refinance a couple of years later, you're probably stuck, especially if you bought your home before the LLPA was implemented in 2009. Refinance loans follow the LLPA just like purchase loans do, and if you got a 6.00 percent rate when you bought the house and rates have dropped to 5.00 percent, by the time you adjust your rate using the LLPA grid, you might find that the rate adjusted with the LLPA is actually higher than what you started out with.

If, however, you have 20 percent or more equity in your property, then you shouldn't be affected by the LLPA. Sometimes people's property values are just on the cusp of avoiding mortgage insurance when pursuing a refinance. For example, your current mortgage balance is $200,000 and the appraised value is $235,000, making the loan-to-value ratio 85 percent. You'll have to add mortgage insurance to the equation because the loan amount is greater than 80 percent of the value. Adding mortgage insurance could effectively negate any savings from a lower rate.

But if the homeowner in this example took out a first mortgage with a small second lien, it might still be worthy of consideration.

Appraised value $235,000

80% of value $188,000

Current balance $200,000

Remainder $ 12,000

The borrower has the choice of coming to the closing table with $12,000 to pay down the principal or taking out a second mortgage. In this instance, he could take a second mortgage in the amount of $12,000. As long as the new monthly payments on both the first and second mortgages still give a reasonable recovery period, a second mortgage can be used on a refinance just as it can be used with a purchase.

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