I Own My House Outright and Want a Loan: Is It Possible?

Getting a loan on a home you own outright

If you’re considering a loan on a home you own outright, it’s important to note that when you own your home without any current mortgage, its entire value is equity.

You can utilize this equity by securing a loan against the home’s worth. Multiple mortgage loan options are available, such as a cash-out refinance, home equity loan, or HELOC.

To make the most informed decision, delve deeper into each option and discover which suits your needs best.

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Can I get a loan on a house that’s paid for?

Yes, you can get a loan on a home you own outright through a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance.

A home equity loan allows you to borrow a fixed amount of money using your home as collateral and pay it back with interest over a set term. A HELOC, on the other hand, works like a credit card where you can borrow money as you need it up to a certain amount, and pay it back with interest.

• When you take out a home equity loan or a HELOC, the lender will determine the amount of equity you have in your home and use that as collateral for the loan. The amount of equity you have is determined by the difference between the current value of your home and the outstanding balance on your mortgage
• Cash-out refinancing allows you to borrow up to 80% of your home’s appraised value. You’ll repay the loan via monthly payments, just like you did before you paid off your mortgage balance

Keep in mind that taking out a loan on a paid-off house puts your home at risk if you are unable to make payments. If you default on the loan, the lender may foreclose on your home to recoup their losses.

So, before taking out a home equity loan, or HELOC, make sure you can comfortably make the monthly payments and understand the risks involved.

Verify your eligibility. Start here

Home equity loans for a paid-off house

Getting a loan on a house you already own lets you borrow against the value of your home without selling.

The type of loan you’ll qualify for depends on your credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), and other factors. But assuming your personal finances are in good shape, you can likely choose from any of the following loan options that we summarized above.

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1. Cash-out refinance

Cash-out refinancing typically involves applying for a new mortgage to replace an existing one and borrowing cash from your home equity. When you already own your home outright, you aren’t paying off an existing mortgage. So most or all of the loan will come to you as a lump sum of cash.

You can typically borrow up to 80% of your home’s value using a cash-out refinance. However, with the VA cash-out refi, you could potentially get up to 100% of your home’s value. But only veterans and active-duty service members have VA loan eligibility.

Refinancing requires a home appraisal to measure your home’s market value. Unless your home is worth over $1 million, in which case you may be able to get an appraisal waiver. You’ll also pay closing costs, ranging between 2% and 5% of your loan balance.

You can pay closing costs out of pocket, or your lender might be willing to cover part of them in exchange for a higher interest rate. Alternatively, you could roll the closing costs into your loan balance.

Cash-out refinancing typically requires a credit score of at least 620. But a higher score (720 and up) will earn you a lower mortgage rate and help you save on interest costs.

2. Home equity loan

Another option is a home equity loan. As with a cash-out refinance, the amount you can borrow is based on your home’s value. Your loan terms will also depend on your credit score.

Homeowners can typically borrow up to 80% of their home’s equity with a home equity loan, which is also known as a second mortgage. However, some smaller banks and credit unions may allow you to pull out up to 100% of your equity.

Once approved, you’ll receive the entire loan amount in cash to use as you wish. Then you’ll repay the loan with interest by making monthly payments.

Home equity loans have higher interest rates than refinancing but lower interest rates than credit cards or personal loans. Since it’s an installment loan with a fixed interest rate, you’ll also have a fixed monthly payment.

Many lenders set their minimum credit score for a home equity loan between 620 and 700.

Verify your home equity loan eligibility. Start here

3. Home equity line of credit (HELOC)

A home equity line of credit is similar to a home equity loan. But rather than receiving a lump sum of cash, borrowers can draw from a line of credit as needed.

Home equity lines of credit often have a draw period of 10 years, meaning you can borrow from the credit line and repay it as often as you want within that time frame. After the draw period ends, there’s typically a repayment period of up to 20 years, during which you cannot borrow from the HELOC and must repay any outstanding balance with interest.

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A HELOC is a revolving account, like a credit card, so the amount borrowed determines your monthly payment. HELOCs usually have variable interest rates.

How to choose a loan on a home you own outright

Although you have several options when getting a loan on a home you own outright, the right mortgage depends on your specific goals. Here’s how to choose the best loan for your financial situation.

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• You need cash to buy another property. You can purchase a new property with the aid of a cash-out refinance or a home equity loan. Both loans give you a lump sum payment up front and let you extend the fixed repayment term over a longer period of time. HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments HELOCs can have higher interest rates and variable rates, leaving you with less certainty about your future rate and monthly payments
• You want to make home improvements. Home equity loans and HELOCs can be used to improve your home by making renovations or repairs. A home equity loan is great for a single project, while a HELOC is better for completing several projects over many years. You can also use a cash-out refi, but if you extend your loan term, you may pay more in interest over the life of the loan. This could make it harder for you to pay off your mortgage and add value to your home.
• You want to consolidate high-interest debts. A cash-out refinance is a way to use home equity to pay off high-interest debts, such as credit card debt or personal loans. It can be a smart way to save money on interest, but it has risks, such as a risk of foreclosure and using a long-term asset, the value of your real estate, to pay for shorter-term needs

Regardless of the type of loan you choose, request quotes from at least three mortgage lenders to compare interest rates, discount points, and upfront fees. This will help you get the best deal.

Pros and cons of getting a loan on a home you already own

Leveraging a fully paid-off home for a loan comes with its own set of benefits and drawbacks. Here’s what you should consider before opting for a home equity loan.

Verify your home equity loan eligibility. Start here

Pros

• Enjoy cost-effective borrowing. Home loans, when taken against a fully-owned property, typically offer more competitive interest rates than personal loans or credit cards. This is due to the house acting as a guarantee. Moreover, when opting for a new loan like a refinance, the associated closing expenses might be on the lower side
• Unlock most of your home’s value. With no existing liens on your property, such a loan lets you access a large part of your equity. Lenders find this arrangement favorable, knowing you’ve successfully cleared a first mortgage. It’s important to keep in mind that the property’s valuation and your credit history will still determine the loan amount
• Benefit from fixed-rate repayments. Such home loans usually come with fixed interest rates, ensuring consistent monthly outflows throughout the loan’s tenure
• Flexibility in how you use your money. The loan amount can be channeled into various needs, be it home refurbishments, debt clearance, or any significant expenditure
• Potential tax benefits. If the loan amount is reinvested into property enhancements, the interest might be deductible, giving it an edge over other financial products like personal loans or credit cards

Cons

• Your property is on the line. If you default on the home equity loan repayments, you risk losing your fully owned home to foreclosure
• It might cost more than other home loans. Generally, home equity loans have steeper interest rates compared to refinancing options and Home Equity Lines of Credit (HELOCs), making them potentially pricier
• Be prepared for closing costs. Typically, these can range from 2% to 5% of the loan value, adding to the overall cost
• Repayment terms might be rigid. Unlike some other options, such as HELOCs, which offer flexibility in repayment and re-borrowing, home equity loans have a fixed repayment schedule
• Risk of the loan exceeding the property value. If you secure a loan on a home you own outright prior to a downturn in the property market, you might find yourself owing more than the property’s worth

3 things to consider before getting a loan on a home you already own

Considering taking a loan on a home you own outright? It’s an important decision with several facets to consider. Let’s delve into three key aspects:

1. Do you really need the liquidity?

What’s your primary motivation for tapping into equity? If you’re planning significant home improvements that could enhance its market value, that’s a strategic approach.

However, if the goal is to address other debts or make purchases that won’t hold their value, exercise caution. You wouldn’t want to jeopardize your home without good reason.

2. How much do you need to borrow and for how long?

The size of your loan will directly determine your monthly commitments. When considering a larger loan amount, it’s important to evaluate the monthly payments, interest rate, and the loan’s lifespan. If you’ve been enjoying a mortgage-free status for a while, it’s worth reflecting on whether you’re ready to recommit to a long-term debt.

3. Are you financially stable?

A few things to consider here. First, ensure that the monthly payments of the new loan align with your budget without overstretching. You should also ensure the offered rate is competitive and aligns with current market rates.

Lastly, always consider if there might be more suitable alternatives. Sometimes, continuing to save or exploring other financing avenues might be more beneficial.

Remember, leveraging your home’s equity is a significant step, and it’s essential to make decisions that resonate with your long-term goals and financial well-being.

How to get a loan on a home you own outright

Getting a home equity loan on home you own outright can be a smart financial decision, allowing you to tap into the equity you’ve built. It can be used for various purposes, such as home improvement, debt consolidation, or funding a significant purchase.

Verify your home equity loan eligibility. Start here

Here is a step-by-step guide on how to obtain a home equity loan on a fully paid-off house:

• Determine your needs: Before applying for a home equity loan, identify why you need the loan and how much you want to borrow. Keep in mind that borrowing more than you need might lead to increased costs and interest rates.
• Calculate your equity: Equity is the difference between your home’s current market value and any outstanding debts secured by the property. Since your house is paid off, your equity is equal to the current market value of your home. You can calculate your home’s equity using online tools or consulting a local real estate agent.
• Check your credit score: A good credit score is essential for obtaining a home equity loan with favorable terms. Check your credit report for any errors and take steps to improve your credit score, if necessary, by paying off outstanding debts and ensuring timely bill payments.
• Shop around for lenders: Research various financial institutions, including banks, credit unions, and online lenders, to find the best home equity loan terms and interest rates. Compare loan offers and choose the one that best suits your needs.
• Gather necessary documents: Prepare the required documentation, including pay stubs, W-2 forms, bank statements, and tax returns.
• Apply for the loan: Fill out the loan application and provide the required documentation. The lender will review your application and determine whether you qualify for the loan.
• Close the loan: If you are approved for the loan, you will need to sign the loan documents and pay any closing costs or fees associated with the loan.

Once the loan is closed, you will receive the loan proceeds in a lump sum, which you can use for any purpose. Remember that you will be required to make monthly payments on the loan, and failure to do so could result in foreclosure on your home.

Alternatives to getting a loan on a home you own

Mortgages on your current home aren’t always necessary when buying a second home, vacation home, or investment property.

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“You may already have enough savings for a down payment without tapping into your equity,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

Before getting a loan on a home you own outright, look into mortgage loans that allow low down payments. Home buyers should consider the following types of loans.

Conventional loans

If you’re buying a new home to use as your primary residence, conventional loans allow financing with as little as a 3% down payment. You could qualify with a credit score as low as 620.

At least a 10% down payment is required for a vacation home, 20% to avoid private mortgage insurance, and 20-25% for a rental or investment property.

Check your conventional loan eligibility. Start here

FHA loans

FHA loans require only a 3.5% down payment, allowing FICO scores as low as 580. You cannot use an FHA loan to purchase a vacation home or an investment property. But you can use one to buy a multi-unit property with up to four units, live in one of the units, and rent out the others.

Check your FHA loan eligibility. Start here

VA loans

VA loans are the best option for eligible veterans and service members due to their low mortgage rates, lack of mortgage insurance, and no down payment. However, they can only be used for a vacation or investment home when buying a multi-unit property with up to four units. You can also use a VA loan to buy a second home, but only if the second home becomes your primary residence.

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Interest rates for a second home

If you’re using cash from your equity to buy another home, make sure you understand how interest rates work on a vacation home, second home, and investment property.

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Since the new home won’t be your primary residence, you can expect a slightly higher mortgage rate. This rate increase protects the lender because these properties have a higher risk of default. That’s because mortgage lenders know that in the event of financial hardship, homeowners prioritize paying the mortgage on their primary home before a second home or investment property.

But although you’ll pay a higher rate when buying a second home, shopping around and comparing loans can help you save. To see the impact of higher mortgage rates, you can experiment with a mortgage calculator.

FAQ: Loan on a home you own outright

Should you mortgage the house you own?

Owning your home outright provides a valuable equity cushion, and it’s exciting when you no longer shoulder the burden of monthly mortgage payments. The good news is that you don’t have to sell your home to access your equity.

Using a cash-out refinance, home equity loan, or home equity line of credit, homeowners can pull cash from their equity and use the money for many different purposes.

Make sure you understand the pros and cons of each type of financing and choose the best one for you based on your specific goals.

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