Can I Refinance with Only 5% Equity? What You Should Know

Refinancing can lower your monthly payment, reduce your rate, remove PMI, or allow you to switch loan types — but what if you only have 5% equity in your home? Can you still refinance?

The short answer: yes, in some cases, but your options may be limited and heavily dependent on loan type, credit strength, and lender risk rules.

Most homeowners are surprised to learn that refinancing with very little equity is possible—but it comes with stricter requirements, higher costs, and a much greater risk of underwriting challenges. Understanding how lenders view low-equity refinances can help you avoid surprises and improve your chances of approval.

Key Takeaways

• You may be able to refinance with as little as 5% equity, but typically only through specific programs such as FHA or certain conventional rate-and-term refinances

• Cash-out refinances are typically not permitted with 5% equity

• Low equity means a high LTV (95%), which increases your rate, adds PMI, and raises costs

• Your credit score, debt-to-income ratio, and home value stability matter even more at low equity levels

• Improving your home's value or paying down a small portion of your loan can significantly increase your chances of approval

Can You Refinance With Only 5% Equity?

Short version: Yes, but your options may be limited.

Home equity is measured using your Loan-to-Value (LTV) ratio:

LTV = Loan Amount ÷ Home Value × 100

With only 5% equity, your LTV is around 95%. That places you in most lenders’ highest-risk category.

Here’s what that means:

You may be able to refinance if:

• You're choosing a rate-and-term refinance

• Your loan is FHA, VA, or certain conventional programs

• Your credit score meets minimum lender requirements

• Your DTI is solid

• Your appraisal supports your home’s value

You may not be able to refinance if:

• You want to take cash out

• Your appraisal comes in lower than expected

• Your credit score is marginal

• Your DTI is too high

• Your loan amount exceeds program limits

Refinance Options When You Only Have 5% Equity

Conventional Refinance (Possible at 95% LTV)

Many conventional lenders allow rate-and-term refinances up to 95% LTV, but:

• You cannot remove PMI

• Your rate may include higher risk-based pricing

• Your appraisal must clearly support your value

• You may need strong credit (typically 680–700+; minimums may be lower but pricing deteriorates quickly below 700)

• Lenders like DTIs ≤ 45%, sometimes tighter

💡 Pro Tip: Conventional loan approval may be possible — but pricing can vary widely, so getting multiple offers is critical. When you receive those offers, compare the Loan Estimates lenders provide to determine which loan is the better deal.

FHA Refinance (Most Flexible for 5% Equity)

FHA is often a great option for low equity refinances.

• Rate-and-term LTV limit: Up to 97.75% for rate-and-term refinances, depending on loan seasoning and program rules

• Credit score minimums: Often 580+

• DTI flexibility: May be more flexible than conventional loans

• PMI (MIP): Required, sometimes for the life of the loan

• Appraisal: Sometimes required (depends on the lender's requirements)

If you currently have an FHA loan, the FHA Streamline Refinance is especially flexible:

• No appraisal (in many cases, depending on the lender)

• Minimal documentation

• No income verification for some borrowers (varies by lender)

This can be the easiest path for a homeowner with very limited equity.

VA Refinance (Possible Even With Zero Equity)

For eligible veterans with VA loans:

VA IRRRL (Streamline)

• No equity requirement

• No appraisal requirement

• Minimal documentation

The VA IRRRL is a very flexible refinance program. If you currently have a VA loan, equity may not matter, depending on your lender’s requirements, but many lenders impose 10% - 20% equity overlays.

VA Cash-Out

Many lenders require 10–20% equity for a cash-out VA loan, so 5% won’t qualify.

Jumbo Loans

Jumbo refinancing at 95% LTV is rarely possible.

Most jumbo lenders require:

• 20%–30% equity

• High credit scores (720–760+)

• Strong reserves

• Low DTI

• Requirements vary by lender.

💡 Pro Tip: Refinance pricing, regardless of the type, varies by lender and can be thousands of dollars different over the loan term. Rates change daily — verify your offer is competitive before you lock.

How 5% Equity Affects Your Refinance Pricing

Lenders price refinances based on risk, and a 95% LTV falls into the highest-risk bucket.

With only 5% equity, you can expect:

1. Higher Interest Rates

LTV-based adjustments often add:

• 0.25% to 0.75% to conventional rates

• FHA and VA pricing is less sensitive but still impacted

• Numbers are for illustrative purposes only; every lender has their own pricing structure.

2. Mandatory Mortgage Insurance

At 95% LTV:

• PMI is required on conventional loans

• FHA requires MIP, sometimes for the entire loan term

• VA IRRRL does not require PMI

3. Higher Closing Costs and Stricter Requirements

Some lenders add:

• Pricing adjusted for risk

• Additional underwriting scrutiny

• Tighter reserve requirements

When Refinancing May Not Make Sense at 5% Equity

Even if you can refinance, you may not want to.

Avoid refinancing at low equity if:

• Your rate improvement is small

• You plan to move within 2–3 years

• You’re taking on a higher total interest

• You’re switching into a loan with expensive mortgage insurance

Use your break-even point to decide:

Break-Even = Total Costs ÷ Monthly Savings

If your break-even timeline exceeds your expected time in the home, refinancing may cost more than it saves.

💡 Pro Tip: No matter the type of refinance you choose, calculate your break-even point for every offer you receive. Don’t be fooled by “low rates” or “no closing costs.” The lowest rate or minimized closing costs doesn’t mean the best deal if your closing costs or high interest rate deplete the savings.

How to Improve Approval Odds With Low Equity

Even with only 5% equity, there are ways to improve your chances of approval.

1. Pay Down a Small Amount on Your Loan

Even $3,000–$8,000 can:

• Lower LTV

• Improve pricing

• Remove PMI sooner

2. Maximize Your Appraisal

Small improvements help:

• Landscaping

• Paint

• Lighting upgrades

• Decluttering before appraisal

• Providing strong comparable sales

At 95% LTV, even a small difference in value can make or break a refinance.

3. Strengthen Your Credit

Lenders scrutinize credit more closely at higher LTVs.

Focus on:

• Paying down card balances

• Avoiding new inquiries

• Avoiding late payments

• Removing errors

Boosting your score by 20–40 points may meaningfully improve rates.

4. Lower Your DTI

Lenders often have tighter DTI limits at higher LTVs.

Lower DTI by:

• Paying off debts with high monthly payments

• Increasing documented income

• Adding a co-borrower

5. Choose the Right Loan Program

If refinancing into FHA or VA improves approval odds, it's worth considering.

💡 Pro Tip: Be sure to compare your options by comparing Loan Estimates from different lenders. You can do this manually, or upload your first Loan Estimate from any lender to Fincast to trigger offers from vetted lenders without another credit pull or unwanted calls.

Alternatives If You Can’t Refinance Yet

If 5% equity makes your desired refinance impossible:

1. Wait and build more equity

You build equity through:

• Home price appreciation

• Loan amortization

• Extra principal payments

Even reaching 10% equity may open up more options.

2. Do a Partial Paydown

A one-time lump sum can:

• Improve LTV

• Improve your rate tier

• Reduce PMI

3. Recast your mortgage

If your lender allows recasting:

• Payment drops

• Same interest rate

• No refinancing needed

Stop Guessing if Your Rate is Competitive

When lenders know you’re in a high-LTV position, pricing differences can be huge — sometimes thousands of dollars.

That’s why it’s essential to check whether your offer is fair.

How Fincast helps:

1. Upload your Loan Estimate

2. Fincast analyzes your offer

3. Vetted lenders compete to beat it

4. You choose the best deal

💡 Pro Tip: High-LTV refinances are where homeowners overpay the most — and also where benchmarking matters most.

FAQs: Refinancing With Only 5% Equity

1. Can I refinance with 5% equity?

Yes, but usually only through FHA, VA, or certain conventional rate-and-term refinances.

2. Can I do a cash-out refinance with 5% equity?

No. Cash-out loans typically require leaving 20–25% equity after closing.

3. Will I need PMI at 95% LTV?

Yes. PMI is required for conventional loans at 95% LTV.

4. Can an FHA streamline refinance work with low equity?

Yes — FHA streamline refinances often don’t require an appraisal, but exact requirements vary by lender.

5. Does equity affect my refinance rate?

Yes. Low equity often leads to higher rates due to risk-based adjustments.

6. What if my appraisal comes in low?

Your refinance may be denied, or you may need to bring cash to close.

7. Should I wait until I have more equity?

If your rate improvement is small or the break-even point is long, waiting may be smarter.

💡 Pro Tip: Still have questions? Upload your Loan Estimate to see exactly how much you could save — no commitment required.

Ready to See Whether Your Refinance Offer Is Really Competitive?

Whether refinancing with a high LTV makes sense depends on your current loan type, the amount of equity, and your financial goals. It works especially well for FHA loans, but borrowers with good credit on conventional loans may also benefit.

Before deciding if refinancing with 5% equity is right for you, verify that you have competitive pricing. No matter the loan type, pricing can vary by thousands among lenders.

👉 At 95% LTV, even small pricing differences can cost you thousands. High LTV borrowers have the least room for pricing mistakes. Before you lock, upload your Loan Estimate to Fincast to see whether lenders will beat it. No credit pulls or sales calls.