Do you need a down payment to refinance your mortgage?

Refinancing your mortgage is basically applying for a new home loan — with one major exception: You rarely need to make a down payment. Lenders assess a borrower’s creditworthiness, but they generally don’t require you to come up with ready money.

You’re not totally off the hook, however. Refinances still carry some costs, so you’ll probably need to have some cash when you close. How much cash largely depends on the type of refinance you do.

Do you need to put money down to refinance a mortgage?

More often than not, you don’t need to put down money to refinance your mortgage. In the typical rate-and-term refinance, which lowers your interest rate and payments and/or shortens your loan term, lenders generally look for an 80 percent loan-to-value ratio (LTV) or lower. Presumably, your home has appreciated in value since you bought it and your mortgage balance has shrunk, so meeting that LTV should be simple. Your current ownership stake in effect acts as your cash contribution to the transaction, taking the place of the down payment you made when you took out your mortgage originally.

Still, while you can usually refinance with no money down, lenders aren’t just giving out refis. Additional factors that contribute to a lender’s decision include the amount of your home equity, your credit score and whether your existing mortgage has been maintained in good standing without late or insufficient payments.

Equity requirements for mortgage refinancing

While lenders might not care about the amount of cash in your checking account for a down payment, they do care about another type of financial reserve. Specifically, they want to see that you have sufficient equity in your home.

Say your house is valued at $400,000 and there’s $300,000 on your mortgage balance. You would have $100,000 of equity or, based on your current home value, 25 percent.

The equity requirement varies depending on the type of refinance you’re considering. Generally, the requirements break down as follows:

• Conventional refinances: As little as 3 percent equity works for a rate-and-term refinance. For a cash-out refi, 20 percent is more the norm.
• FHA refinances: You’ll need 20 percent down to pursue a cash-out refinance, but you can explore rate-and-term and streamlined refis with just 2.25 percent equity.
• VA refinances: With a VA loan refinance, you can take out up to 100 percent of your home’s value.
• USDA refinances: You might be able to explore a USDA refinance (specifically, a Streamlined Assist Refinance Loan) with no equity (i.e., 0 percent).

What are closing costs for refinancing?

Even though you don’t need a down payment to refinance, you do have to pay for it. Refinancing comes with closing costs. The average refinance closing costs total around $5,000, according to Freddie Mac, and can include:

Closing costs are generally due at the closing table. Or you may have the option to roll them into the loan to keep more money in your pocket at closing (see below).

Either way, be sure to consider the point when you’ll break-even to determine whether the cost is worth the savings you’ll realize. You can use Bankrate’s refinance calculator to see how many months it’ll take to recoup the closing costs. If you don’t plan to stay in your home for a long time or are near paying off your mortgage, embarking on a refinance might not be worth it.

What is a cash-in refinance?

A cash-in refinance is basically the opposite of a cash-out refinance, in which you swap your current mortgage for a larger one, pocketing the extra amount for immediate use. The key distinction: While a cash-out refinance increases the overall amount you owe on your home, the cash-in refinance reduces the principal amount you owe.

A cash-in refinance involves you bringing money to the table, similar to the down payment you made when you originally purchased the home. As part of the refinance process, you make a single, lump sum payment toward the principal balance owed on the home loan. Making this payment reduces the total amount owed and as a result, your refinanced mortgage will have a smaller principal balance.

This approach to refinancing can make sense if you’re looking to lower your ongoing costs. For instance, a cash-in refinance can help decrease your monthly payments even if you’re shortening the loan term (usually, the shorter the term, the bigger your monthly payments). It can also help you get a lower interest rate and bring your LTV to the point where you can get rid of private mortgage insurance (PMI).

This approach makes good sense if you’ve recently come into a significant amount of money that you can use to prepay a chunk of the mortgage, significantly reducing your overall debt load.

How to avoid paying money upfront when you refinance

Your lender might let you roll your closing costs into your loan via a no-closing-cost refinance. Be aware that this strategy lets you avoid paying the costs upfront— it doesn’t eliminate them. The disadvantage to that is you’ll pay interest on a higher loan amount and can end up paying much more over time. Still, if you’re strapped, it might be the best way to go.

You can also try negotiating your closing costs. If you’ve had a loan with the lender in the past or are otherwise a client in good standing, you might be able to persuade them to waive some. Additionally, there are some costs, like the appraisal or survey, that may not need to be performed if you’ve had them completed recently. Or you may be able to swap the appraisal for a much cheaper broker price opinion.

How to get the lowest refinance rate

Another way to reduce the cost to refinance is to get the lowest possible interest rate. While mortgage interest rates have been elevated of late, you can take these steps to obtain the best rate possible in the current environment.

• Improve your credit score. Take action to make on-time payments and reduce your credit utilization to improve your credit score. Also, review your credit report for errors and have them fixed as soon as possible.
• Pay points. Depending on your situation and timeline, it might make sense to pay discount points. Generally, each point you pay reduces your mortgage rate by 0.25 percent, and one point costs 1 percent of the amount of the loan. So, if the mortgage rate on a $150,000 refinance would normally be 7 percent, paying one point could reduce it to 6.75 percent, at a cost of $1,500 upfront.
• Shop around. One of the best things you can do to reduce your mortgage rate is to shop around. You can compare multiple lenders online to find the best deal, and then factor in any fees and closing costs. Lenders are a competitive bunch, and one institution might even try to match a competitor’s offer to sign you up.

Even with rates on the rise, refinancing can be worth the cost for many homeowners. It’s important to run the numbers to see what your costs are, and then consider how long you’ll be in the home, as well as how long it will take you to break even.

Bottom line

To recap, do you need a down payment to refinance? No. But do you have to pay to refinance? Yes. You will need to come up with some cash — usually to cover not-inconsiderable closing costs. The overall amount you’ll spend on refinancing often depends on the  type of refinance  you pursue.

Additional reporting by Allison Martin