Conventional Refinance With Less Than 20 Percent Equity — The Quick Read: Yes, you can usually refinance a conventional loan with less than 20% equity, but the new loan carries mortgage insurance once it passes 80% of the home’s value. On a one-unit primary residence, a rate-and-term refinance can reach 95% loan-to-value, and 97% where the existing loan is agency-owned and the first-time-buyer program allows. A cash-out refinance is different. It stops at 80%. Whether the refinance is worth doing comes down to how long the savings outlast the closing costs and the insurance.
What Does “Less Than 20% Equity” Mean for a Refinance?
Equity is the home’s value minus what you owe. Loan-to-value (LTV) flips that around: the new loan balance divided by the home’s value. With 20% equity, you sit at 80% LTV. With 10% equity, you sit at 90%. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
One point trips up many homeowners. The value that counts is the new valuation at refinance, not your original purchase price. A home that has appreciated gives you more equity than your payoff history alone suggests. A home that has slipped gives you less.
Why 80%? The line isn’t a lender whim. Conventional loans follow an 80% loan-to-value threshold, and Fannie Mae’s Selling Guide points to the same line: a conventional first mortgage above 80% LTV needs a primary mortgage insurance policy unless the lender provides another approved credit enhancement. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
So “you can’t refinance without 20% equity” is a myth. What you can’t do is skip the insurance cost above 80%.
How Is a Low-Equity Refinance Underwritten, Step by Step?
The process follows a predictable path. Across the wholesale programs Lendmire works with, the steps look like this, subject to lender guidelines and full file review.
1. Pick the transaction type. A rate-and-term refinance (the agencies call it “limited cash-out”) replaces your existing first mortgage and covers closing costs, with only incidental cash back. A cash-out refinance pulls equity out. The two have different leverage caps.
2. Establish value. The lender may use a full appraisal, an automated valuation, or another accepted method. Some files qualify for what Fannie Mae now calls “value acceptance,” which used to be called an appraisal waiver. The automated underwriting findings decide that. It isn’t your choice, and the system can still call for a full appraisal.
3. Calculate LTV. New first-lien balance divided by value. If you have a second lien that stays in place, combined LTV also matters.
4. Run credit, income, assets and ratios. Wholesale conventional programs start at a 620 decision score. The automated finding governs most files, with a total debt-to-income ceiling of 50%. Manually underwritten loans use 36% or 45%, depending on the reserve and score factors in the Eligibility Matrix.
5. Choose the mortgage insurance structure. More on that below.
6. Review the Loan Estimate. Because this is a consumer mortgage, you receive a Loan Estimate showing closing costs and estimated cash to close, then a Closing Disclosure before signing.
Credit score and LTV together drive both the insurance cost and the loan-level price adjustments Fannie Mae applies. Lower score plus higher LTV means a heavier load.
What Leverage Can You Actually Reach?
The ceiling depends on the transaction and the property. This table covers the conventional figures for a primary residence unless noted.
| Transaction | Max LTV | Mortgage insurance? |
|---|---|---|
| Rate-and-term, one-unit primary | 95% (97% in qualifying cases) | Yes, above 80% |
| Cash-out, one-unit primary | 80% | No, at or below 80% |
| Cash-out, 2-4 unit primary | 75% | No, at or below 80% |
| Cash-out, second home | 75% | No |
The 97% tier has strings attached. Per Fannie Mae’s limited cash-out rules, the lender must confirm that Fannie Mae owns the existing loan. If the automated system can’t identify it, the lender needs documentation. Plenty of borrowers don’t know who owns their loan, so this is worth checking early. The Fannie Mae Eligibility Matrix lays out maximum LTVs by occupancy, units and transaction type. Matrices change, so confirm the live version before counting on a specific tier.
Occupancy changes the answer fast. A second home and an investment property get lower caps than a primary residence. If your question is about a property you don’t live in, occupancy decides the leverage, and the matrix is where to look.
How Does Mortgage Insurance Work on a Refinance?
Mortgage insurance protects the lender, not you, on the first losses if a loan above 80% LTV defaults. You pay for it. How you pay is a real choice. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Borrower-paid monthly insurance is the common structure. It’s a recurring line in the housing payment and counts toward your debt-to-income ratio. Published typical annual premiums run from 0.58% to 1.86% of the balance. That’s a range, not a quote. Your credit score, LTV and loan structure set where you land.
Lender-paid insurance removes the monthly line, but the cost doesn’t vanish. It gets built into the pricing of the loan. You trade a visible monthly charge for a less visible, permanent one. That can suit someone who expects to keep the loan a short time, and it can hurt someone who stays long.
Minimum versus standard coverage is a lender-side choice. Per Fannie Mae’s coverage rules, coverage is tied to LTV bands (80.01–85%, 85.01–90%, 90.01–95% and 95.01–97%), and a lender that picks less than standard coverage pays an added price adjustment. Coverage percentage isn’t your premium. It’s the share of the loan the insurer covers.
Paying down to 80% avoids insurance entirely. If you’re sitting at 82% or 83% LTV, bringing cash to the table to cross under 80% can beat living with years of premiums. Run it both ways. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Can You Get Rid of PMI Later?
Yes, and this matters as much as the refinance itself. Under the Homeowners Protection Act, as the CFPB and OCC’s consumer site describe it, you may ask your servicer to cancel when the balance is scheduled to reach 80% of the home’s original value. Conditions apply: a written request, a good payment history, current payments, no subordinate liens, and proof that value hasn’t fallen below the original.
At 78% of original value, the servicer must terminate it automatically, generally. The law also requires termination at the midpoint of the loan term if you’re current.
Here’s the catch. Those rights run off original value and the scheduled balance. Appreciation doesn’t make PMI drop on its own. A current-value path exists under Fannie Mae’s servicing rules, but it requires a request, seasoning and a new valuation, and the valuation can come at your expense. Seasoning and lower LTV thresholds also apply to some property types. Your servicer is the place to confirm what applies to your loan.
Fannie Mae has also recently let servicers reach out to borrowers who may qualify for current-value termination, per its lender letter on mortgage insurance termination. That doesn’t remove the eligibility tests. Payment history, seasoning and a valuation still apply.
Take this into account when you refinance. A new loan resets the clock on “original value.” If you’ve owned the home for years, appreciated meaningfully, and are close to a cancellation threshold on your current loan, refinancing into a new loan above 80% could put you right back where you started.
Where the General Rule Breaks
A few named edge cases change the picture.
FHA to conventional. Moving off an FHA loan can remove FHA mortgage insurance, but only if your LTV and credit support a conventional loan. The two insurance types are different products with different removal rules. If you’re at 90% LTV, you’d swap one insurance charge for another, so compare the two lines on your Loan Estimate. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Government streamlines. If your existing loan is FHA or VA, a streamline may beat a conventional refinance. FHA Streamline needs no appraisal and only limited credit review, with a net tangible benefit test. FHA rate-and-term with an appraisal goes to 97.75%. The VA IRRRL requires an existing VA loan, a 0.5% funding fee unless you’re exempt, no VA appraisal, a net tangible benefit, and seasoning of the later of 210 days and six payments. For a borrower with a government-backed loan and thin equity, these can be the better fit. For one with a conventional loan, they don’t apply.
Cash-out seasoning. A conventional cash-out requires the first mortgage being paid off to be at least 12 months old, measured note date to note date, and a borrower on title for six months. Delayed financing, inheritance and legal-award exceptions exist.
The no-insurance high-LTV lane. One wholesale lane reaches 89.99% LTV on a cash-out with no mortgage insurance. It needs a 680 score, a 50% ratio, a thirty-year fixed rate, a primary residence, a conforming balance and six months of seasoning. It isn’t written in Texas, where the state constitution caps homestead cash-out at the agency figure. For the right borrower, it solves the insurance problem entirely. For many others, the score or seasoning requirement rules the option out.
Recent payment problems. Programs screen the existing loan’s history. Late payments in the past year can close the door on certain refinance paths even when equity looks fine. Credit events carry agency waiting periods: four years from a chapter 7 discharge, seven from a foreclosure, and four from a short sale or deed-in-lieu, shorter with documented extenuating circumstances.
Income-limited programs. HomeReady and Home Possible carry an income limit of 80% of area median income. They can reduce insurance coverage requirements at higher LTVs, which is the main benefit, but only for borrowers under the cap.
Above the conforming limit. Jumbo lanes take over, with a 660 decision score, leverage to 90%, loans to $5,000,000 and a 50% ratio ceiling on the fixed lanes. These are separate programs with their own overlays.
Is Refinancing With PMI Worth It?
It depends on what you’re trying to fix. This is where the decision gets real.
Picture a homeowner at 90% LTV who wants to refinance into a better loan. The new loan carries mortgage insurance. If the savings from the new terms exceed the insurance charge and pay back the closing costs within the time you’ll realistically keep the loan, it can work. If you plan to move in three years, it probably doesn’t.
Now picture a homeowner at 82% LTV. A small cash payment at closing to cross 80% eliminates the insurance and may change the whole math. The flip point is how much cash you’d need versus how many years of premiums you’d avoid.
Then consider someone who simply waits. If you’re a year or two from the 80% cancellation point on the current loan, a refinance that resets “original value” might cost more than it saves. Waiting and requesting removal can beat refinancing.
The break-even test has four parts:
- Monthly savings (or increase) in the full housing payment, including insurance
- Total closing costs, shown on the Loan Estimate, plus any lender-side price adjustments
- How long you expect to keep the loan
- Whether the new loan resets your path to removing insurance
Closing costs are the upfront charges to get the loan and transfer ownership. Terms like “no closing costs” or “no-cost refinance” usually mean the costs are folded into the rate or the balance. They don’t disappear. The Loan Estimate shows what you’re paying either way.
One more variable: the appraisal. Value is what sets your LTV. If your estimate of the home’s worth is optimistic, a lower appraisal can push you over a threshold and change both the insurance and the price adjustments. For a related look at that problem, see Lendmire’s piece on low appraisal refinance options.
What Should You Do Before Applying?
Pull together a short checklist.
- Estimate your LTV using a realistic value, not a hopeful one.
- Find out whether your current loan is agency-owned if you’re aiming for the top leverage tier.
- Check your payment history on the existing loan for the past year.
- Look at how close you are to 80% of original value on your current loan.
- Decide whether you’d bring cash to cross under 80%.
- Compare at least two structures: borrower-paid insurance and lender-paid.
Lendmire’s conventional loan programs are arranged through wholesale lenders, so one application can be matched against more than one structure. For the requirements side, the conventional refinance requirements article walks through documentation and eligibility.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Loan-to-value (LTV): The new loan balance divided by the home’s appraised or accepted value.
Limited cash-out refinance: A refinance that pays off your existing first mortgage and closing costs, with only incidental cash back. People also call it rate-and-term.
Private mortgage insurance (PMI): Coverage on a conventional loan above 80% LTV that protects the lender, paid by the borrower or built into pricing.
Loan-level price adjustment (LLPA): A pricing add-on from Fannie Mae based on credit score, LTV and loan features.
Value acceptance: An automated underwriting offer that lets a lender use an estimated value instead of ordering an appraisal. It’s decided by the system, not the borrower.
Seasoning: The minimum time you must have held the loan or the property before a refinance is allowed.
Frequently Asked Questions
Can I refinance if I only have 5% equity?
Often yes, on a one-unit primary residence. A rate-and-term refinance can reach 95% LTV, which is exactly 5% equity, and 97% when the existing loan is agency-owned and the first-time-buyer program allows. Mortgage insurance applies, and credit score, ratios and payment history all matter. Subject to lender guidelines and full file review.
Can I take cash out with less than 20% equity?
Not on a conventional loan. A one-unit primary residence cash-out stops at 80% LTV, and two- to four-unit primaries, second homes and investment property stop at 75%. One wholesale lane reaches 89.99% with no mortgage insurance, but it requires a 680 score, a 50% ratio, a thirty-year fixed rate and six months of seasoning, and isn’t written in Texas. Exact terms depend on lender and investor guidelines, credit profile, reserves, and property review.
Will my PMI come off automatically if my home goes up in value?
No. Automatic termination at 78% runs off the original value and the scheduled balance, not today’s market value. Using appreciation to cancel earlier requires a request, seasoning, a good payment history and a new valuation, which may be at your expense. Your servicer can tell you which path your loan allows.
Does a refinance reset my PMI removal timeline?
Yes, in most cases. A new loan has a new original value and a new balance, so the 80% and 78% marks are measured from the refinance. If you’re close to cancelling the current insurance, that’s a real cost to weigh against any rate or term benefit.
Do I always need an appraisal to refinance?
Not always. Some files get value acceptance, where the lender uses a value estimate instead of an appraisal. The automated underwriting findings decide that, and a full appraisal can still be required. It’s the system’s offer, not a borrower right.
If you are weighing a refinance and want the break-even run on your own numbers, Lendmire can help you compare the programs on the same home.
For the program’s current guidelines, see a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, USDA and HUD-184 home purchase financing with grant-style, forgivable and repayable down payment assistance options in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B7-1-01: Provision of Mortgage Insurance
2. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
3. Fannie Mae Eligibility Matrix
4. Fannie Mae Selling Guide B7-1-02: Mortgage Insurance Coverage Requirements
5. HelpWithMyBank.gov – Removing PMI
6. lender letter on mortgage insurance termination
This article is part of Lendmire’s Conventional Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Refinancing A High-balance Conforming Loan In A High-cost County · Homeready And Home Possible Refinances: Income Limits And Who Qualifies · Conventional Refinance Requirements: Credit, Equity, And Ratios
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.