I Own My House Outright and Want a Loan: Is It Possible? | 2024

Getting a loan on a home you own outright

If you’re considering a loan on a house you own outright, you might be wondering how to access your home’s equity without selling your property.

When you own your home without a current mortgage, its entire value is equity, which you can use to secure a loan.

If you encounter an unexpected expense or come across a real estate investment opportunity, tapping into the equity of your home can be quite useful. The good news is that you have multiple loan options available, each with unique advantages. Here’s what you should know.

In this article (Skip to...)

• Mortgage-free loan
• Loan options
• How to choose
• How to qualify
• Alternatives
• Interest rates
• FAQ

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

Yes, you can get a loan on a house you own outright. When your home is fully paid off, you have several loan options available that allow you to access your home’s equity without selling your property.

Qualifying for a loan on a paid-off house

To qualify for a loan on a paid-off house, lenders will consider several factors:

• Credit score: A higher credit score demonstrates your creditworthiness and can help you secure better loan terms.
• Debt-to-income ratio (DTI): This is the percentage of your monthly income that goes towards paying off debts. A lower DTI shows that you have a healthy balance between income and debt, which can improve your chances of loan approval.
• Loan-to-value ratio (LTV): LTV is the ratio of the loan amount to the value of your home. Lenders typically prefer a lower LTV, as it represents less risk for them.

Risks to consider

While getting a loan on a paid-off house can provide access to funds, it’s crucial to understand the risks involved:

• Foreclosure: If you default on your loan payments, you risk losing your home to foreclosure, even if you previously owned it outright.
• Overextending your finances: Taking on a new loan means additional monthly payments. Make sure your income is stable and you can comfortably afford these payments without straining your budget.

Before committing to a loan, carefully assess your financial situation and create a plan to repay the loan on time.

Next, let’s explore the different types of loans available for homeowners who own their homes outright.

How to borrow against a house you own outright

If you own your home outright and need to access the equity you’ve built, getting a loan on your house can be a smart financial move. Depending on your situation, you may have several loan options available to you.

1. Home equity loan

A home equity loan, also known as a second mortgage, allows you to borrow against your home’s equity in a lump sum. Homeowners can typically borrow up to 80% of their home’s equity, although some lenders may allow you to borrow up to 100%.

Key points about home equity loans:

• Fixed interest rates and monthly payments provide predictability
• Typically requires a minimum credit score between 620 and 700
• Interest rates are usually higher than HELOC rates but lower than credit cards or personal loans

Once approved, you’ll receive the entire loan amount in cash and repay it with interest through fixed monthly payments over a set term.

2. Cash-out refinance

A cash-out refinance allows you to tap into your home’s equity by replacing your existing mortgage with a new, larger one. The difference between your new loan amount and your current mortgage balance is given to you in cash. When you own your home outright, most or all of the new loan will come to you as a lump sum.

Key points about cash-out refinancing:

• You can typically borrow up to 80% of your home’s value (up to 100% with a VA cash-out refinance)
• Closing costs range between 2% and 5% of your loan balance
• A minimum credit score of 620 is generally required, but a higher score (720+) will secure a lower rate

To qualify for a cash-out refinance, you’ll need to have your home appraised to determine its current market value, though homes valued over $1 million may be eligible for an appraisal waiver. You can choose to pay closing costs out of pocket, have your lender cover them in exchange for a higher interest rate, or roll them into your new loan balance.

Interest rates for cash-out refinancing are usually lower than other home equity borrowing options, such as home equity loans or HELOCs, but they tend to be higher than rates for traditional mortgage refinancing.

3. Home equity line of credit (HELOC)

A HELOC is a revolving credit line that allows you to borrow against your home’s equity as needed. HELOCs typically have a draw period of 10 years during which you can borrow money and repay it, and then a repayment period of up to 20 years.

Key points about HELOCs:

• Variable interest rates, which can result in fluctuating monthly payments
• Interest rates are often initially lower than home equity loan rates
• Revolving credit line allows for flexibility in borrowing and repaying funds

During the repayment period, you cannot borrow additional funds from the HELOC and must repay any outstanding balance with interest.

4. Sale-leaseback program

A sale-leaseback program allows homeowners with bad credit to access their home equity by selling their property to a company or investor and then leasing it back. This arrangement enables homeowners to continue living in the home as tenants while accessing the equity they have built up.

Key points about sale-leaseback programs:

• May be more accessible to homeowners with bad credit.
• Focus is on the value of the property rather than credit score.
• Allows access to home equity without taking on additional debt.
• Terms of the agreement can vary significantly between programs.

If a homeowner needs money but wants to stay in their house, sale leaseback programs may be a good fit.

5. Shared equity agreement

A shared equity agreement is a financial arrangement that may be suitable for homeowners with less-than-perfect credit. An investor provides cash to the homeowner in exchange for a share of the home’s future value appreciation. Unlike a traditional loan, there are no monthly payments involved.

Key points about shared equity agreements:

• Receive cash without taking on additional debt or making monthly payments.
• Retain ownership of your home.
• Homeowner shares potential gains (or losses) with the investor when the agreement ends.
• May be more accessible to homeowners with credit challenges.

Shared equity agreements can be a good option for homeowners who want to access their home equity without taking on additional debt.

6. Reverse mortgage

A reverse mortgage is a loan available to homeowners aged 62 or older, allowing them to convert a portion of their home equity into cash. With a reverse mortgage, homeowners do not have to make monthly mortgage payments.

Key points about reverse mortgages:

• Available to homeowners aged 62 or older, regardless of credit score.
• Convert home equity into cash without monthly mortgage payments.
• Loan balance grows over time as interest accumulates.
• Typically repaid when the homeowner sells the home, moves out, or passes away.

Reverse mortgages can be a useful tool for seniors who want to access their home equity while staying in their homes.

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 choice depends on your specific goals. Here’s how to choose the best loan for your financial situation:

You need cash to buy another property

Cash-out refinances and home equity loans provide lump-sum payments and fixed repayment terms, making them suitable for purchasing a new property. HELOCs may have higher, variable interest rates, leading to less predictability in your future payments.

Example: Let’s say you want to buy a rental property to generate passive income. A cash-out refinance could provide the funds for a down payment while allowing you to lock in a fixed interest rate and spread the payments out over 30 years. This predictable monthly expense can make it easier to forecast your cash flow from the rental.

You want to make home improvements

Home equity loans are ideal for single home improvement projects, while HELOCs are better for multiple projects over an extended period. Cash-out refinances can also fund renovations, but extending your loan term may result in paying more interest overall.

Example: Your kitchen is outdated and in need of a complete remodel. A home equity loan could provide the necessary funds in one lump sum, which you can then repay over a fixed term of 5–15 years. The consistent monthly payments make it easier to budget for this major renovation project.

You want to consolidate high-interest debts

A cash-out refinance can help you pay off high-interest debts like credit cards or personal loans, potentially saving you money on interest. However, using this strategy exposes you to risks like foreclosure and turns your unsecured debt into debt secured by your home.

Example: Imagine you have $25,000 in credit card debt with an average APR of 18%. By using a cash-out refinance to pay off this debt, you could reduce your interest rate to around 5% (depending on your credit score and loan terms). This could save you a significant amount in interest charges over time. Just be aware that you are turning your unsecured debt into a home-secured debt.

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 benefits and disadvantages. Here’s what you should consider before tapping your home equity.

Pros

• Cost-effective borrowing with competitive interest rates compared to personal loans or credit cards.
• Access a large part of your equity with no existing liens, as lenders favor a cleared first mortgage.
• Fixed-rate repayments ensure consistent monthly outflows throughout the loan’s tenure.
• Flexibility in using the loan amount for various needs like home refurbishments or debt clearance.
• Potential tax benefits if the loan is used for home improvements.

Cons

• Risk of foreclosure if you default on the home equity loan repayments.
• Higher interest rates compared to refinancing options or home equity lines of credit (HELOCs).
• Closing costs range from 2% to 5% of the loan value, adding to the overall cost
• Rigid repayment terms compared to HELOCs, which offer flexibility in repayment and re-borrowing
• Risk of owing more money than the property’s worth if market value declines after securing the loan

What to consider before getting a loan on a home you already own

Considering taking a loan on a home you own outright? Before turning your homeownership into cash, it’s important to understand the risks involved.

1. Do you really need the liquidity?

What’s your primary motivation for tapping into equity? If you’re planning significant home improvements or remodeling that could enhance its market value, then borrowing against your equity could be a strategic move. This approach allows you to invest in your property, potentially increasing its resale value, while leveraging the existing equity you’ve built up.

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?

There are 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 a home you own outright can help you tap into the amount of equity you’ve built. It can be used for various purposes, such as home remodeling, debt consolidation, or funding a significant purchase.

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

Step 1: Determine your needs

Identify why you need the loan and how much to borrow. Borrowing more than needed might increase costs and interest rates. Have a clear plan for using the loan to avoid overborrowing.

Step 2: Calculate your equity

Equity is the difference between your home’s current market value and any outstanding debts. Since your house is paid off, your equity equals the current market value of your home. Consider a professional appraisal for a precise estimate.

Step 3: Check your credit score

A good credit score is essential for favorable loan terms. Check your credit report for errors and take steps to improve your score if needed.

Step 4: Shop around for lenders

Research banks, credit unions, and online lenders for the best terms and rates. Negotiate with lenders and carefully review fees, penalties, and flexibility.

Step 5: Gather necessary documents

Prepare pay stubs, W-2 forms, bank statements, and tax returns. Ensure documents are up-to-date to streamline the application process.

Step 6: Apply for the loan

Fill out the application and provide the required documentation. Be prepared to answer questions about your finances and loan purpose.

Step 7: Close the loan

If approved, sign the loan documents and pay any closing costs or fees. Review the terms carefully before signing, as the agreement is legally binding. You’ll receive the loan proceeds in a lump sum.

If you opt for a HELOC, you’ll have a revolving credit line secured by your home, allowing you to draw funds as needed up to a limit and only pay interest on the amount used.

Alternatives to getting a loan on a house you own outright

When purchasing a second home, vacation home, or investment property, it isn’t always required to mortgage your current home.

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

If you own a house outright and are considering financing, explore home loans that offer low down payments.

• Conventional loans: Ideal for purchasing a new home as your primary residence with a minimum down payment of 3% and a minimum credit score of 620. Investment properties require a 20–25% down payment, with lower interest rates available.
• FHA loans: Suitable for home buyers with FICO scores as low as 580, requiring only a 3.5% down payment. Allows the purchase of multi-unit properties (up to four units), with the option to live in one unit and rent out the others.
• VA loans: Exclusively for eligible veterans and service members looking to purchase a new home without a down payment or mortgage insurance. Applicable for multi-unit investment properties (up to four units) or buying a second home that will serve as a primary residence.

Interest rates for second homes

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

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 types of loans 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.

Even though securing a loan for a second home usually means higher interest rates, by thoroughly comparing loan options, you can find a more affordable, lower rate. Using a mortgage calculator is a smart way to see how a lower rate on your secured loan can reduce your overall payments, helping you make a more cost-effective decision.

FAQ: I own my house outright and want a loan

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 the amount of equity in their homes and use that money for whatever they like.

Make sure you understand the pros and cons of each type of loan and choose the best one for your personal finances.