Do You Lose Equity When You Refinance?

Mortgage refinancing does not have to result in home equity loss. For instance, if your home’s current appraised value is $300,000, and you still owe $180,000 of your mortgage, refinancing that amount does not change the worth of your home or the fact that you still have $120,000 in home equity. Typically, refinancing involves taking out a new loan to replace your existing mortgage for reduced rates and the goal to increase equity quickly. 

But do you lose equity when you refinance? The truth is that if you’re not careful about refinancing, it can result in you losing your home’s equity in specific cases. Let’s explore these cases in detail!

What Should You Consider Before Refinancing Your Mortgage?

Typically, your home equity remains intact when refinancing a mortgage with a new loan, but you should consider the fluctuating home equity value. Multiple factors in your neighborhood can affect your home’s value, such as interest rates, school rezoning, unemployment levels, crime rates, and more.

Always determine your home’s value before considering refinancing your mortgage, especially if you choose cash-out refinancing. 

How Does Refinancing Affect Your Home Equity?

Refinancing can impact your home equity in the following cases:

Cash-Out Refinance

Your home equity will drop drastically if you choose cash-out refinancing. This type of mortgage refinancing essentially allows you to take out cash against a percentage of your home equity. So, the lender keeps your equity as collateral. That said, you can only tap up to 80% of your home equity through a cash-out refinance. You will retain at least 20% of your equity in such cases. 

Cash-out refinancing can help you with several costly tasks, such as home improvement projects, paying medical bills, student loan payments, etc. However, you should not take out a cash-out refinance unless you are 100% sure you will be able to manage timely payments. Otherwise, you risk losing your home equity. 

Closing Costs

Refinancing loans come with closing costs, including a loan origination fee, home appraisal fee, application fee, etc. Some lenders allow you to roll your closing costs into a straight refinance loan. In such instances, you have to cash in your equity to cover these costs, reducing your total home equity. 

For instance, if the closing costs on your mortgage refinancing loan are $5,000 and the mortgage you’re refinancing is $200,000, the lender can loan you $205,000. It will reduce your total home equity by 

$5,000 since you will borrow that amount against the home equity. Rising or falling property prices might offset or aggravate this equity loss. With that said, you might still benefit financially over the refinance loan term due to the amount you will save on mortgage interest. 

Can a Straight Refinance Help You Grow Your Home Equity?

A straight refinance is when you borrow the exact balance you owe on your existing mortgage. Such mortgage refinancing helps you get lower interest rates and reduced loan repayment time. With this refinance, you can pay off more of your principal balance every time you make a payment, allowing you to build your home equity faster than you would have built it with your old mortgage. So, such a mortgage refinance can help you increase your home equity quickly in the long run. 

The Bottom Line

Always keep up to date with your home’s current appraisal value and home equity and compare mortgage refinance rates and benefits before deciding to refinance your loan. Otherwise, it might hurt your home equity. You can discover more by clicking on the offers below.