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Mortgage  Question?
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What are my refinance options for a home I own with a home equity loan a parent took out?

I own a home worth $230,000 with a $90,000 mortgage balance. My father took out a $120,000 30 year home equity loan on the property in 2004 that I have been paying since 2005. What are my refinance options?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

Based on the information you provided you should have plenty of refinance options, depending on your personal financial and credit profile.  In order to refinance your mortgage you must have sufficient equity in your property and it seems like you do.  Depending on the interest rate on the home equity loan, after twelve years, the principal balance of the loan should be approximately $90,000.  The $90,000 home equity loan balance plus your $90,000 current mortgage balance means you have $180,000 in total mortgage debt on the property.  Using a property value of $230,000, that means you have $50,000 in equity in the property ($230,000 (property value) - $180,000 (total mortgage debt) = $50,000 (property equity)).  That should be sufficient equity for you to refinance the property using a conventional loan program.  Our comprehensive Mortgage Refinance Guide takes you through the refinance process from start to finish.

When you refinance the property, you are required to pay off all existing loans against the property.  In your case, you would take out a new $180,000 mortgage (and potentially higher if you want to include closing costs in the loan amount) and use the proceeds to pay off the existing mortgage plus the home equity loan your father took out.  Based on a property value of $230,000 and a new mortgage amount of $180,000, your loan-to-value (LTV) ratio would be approximately 78%, or below the 80% maximum (LTV) limit most lenders apply.  The LTV ratio is the ratio of the mortgage amount to the fair market value of the property.  It is certainly possible to get a mortgage with an LTV ratio above 80% (so a higher loan amount in your case) but lenders may charge a higher interest rate or private mortgage insurance (PMI), which increases your mortgage costs.   

In addition to how much equity you have in your home and the LTV ratio for you new mortgage, lenders also apply borrower mortgage qualification guidelines based on your monthly income and debt, credit score and employment history to determine your ability to qualify for the refinancing.  Lenders want to make sure that you can afford your new mortgage payment and meet their minimum credit score standards.  We recommend that you contact three-to-four lenders to understand their borrower qualification guidelines and shop your refinancing.  You can use the INTEREST RATES function on FREEandCLEAR to review refinance rates and fees for lenders in your area.  Comparing refinance proposals from multiple lenders is the best way to find the mortgage that is right for you.  

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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