I own my house outright and want a loan: A guide

Having a paid-off home is a dream for most homeowners. Paying off your mortgage eliminates one of the largest monthly expenses for most households and frees up cash to save, invest, and more. But if you need a large sum of money, many people wonder, "What happens if I own my house outright and want a loan?" Well, it is possible to get a new loan against your home. Here's everything you need to know about how to borrow against your home, including six different financing options available to homeowners with a paid off house.

Can I get a loan on a house I own outright?

Yes, it is possible to borrow against your home as long as you can qualify with your credit score and income. In fact, the process may be simpler than if you have an existing mortgage for several reasons.

• No loan payoff requests. Since you don't have an existing loan, the new lender won't need to request a payoff from the previous lender. This reduces extra fees a lender may charge and speeds up the process of getting your new loan.
• No subordination is necessary. For other loan products, like a HELOC or HEI, the new lender doesn't need to take a second position behind your primary mortgage.
• Easier to qualify with DTI ratios. Without a first mortgage, you won't have that monthly payment impacting your debt-to-income ratios. If your DTI is too high, a lender may decline your application.

I own my house outright and want a loan; what are my options?

If you're one of the homeowners who can say, "I own my home outright and need a loan," you have numerous financing options to tap your home's equity. Depending on which option you choose, lenders allow you to borrow a substantial portion of your equity.

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Here are a few of the types of loans available, including the loan terms you can expect.

HELOC

A home equity line of credit (HELOC) is a flexible financing option that gives homeowners a maximum credit line that they can use repeatedly for a number of years. Most lenders allow borrowers to get a HELOC of up to 80% to 90% of the home's appraised value. If your home is worth $400,000, then your maximum credit limit would be $320,000 to $360,000.

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Major banks typically do not charge origination fees or annual fees when opening a HELOC. However, they may charge a fee if you close it quickly or do not borrow any money in a given year.

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During the draw period, you can withdraw cash as often as you like, up to your available credit limit. As you pay down the balance, you'll free up borrowing capacity to draw down again in the future.

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HELOCs have variable interest rates and monthly payments based on that month's average balance. If your balance is zero, then there is no monthly payment due.

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When the draw period expires (typically after 10 years), the outstanding balance converts to an amortizing loan. The rate and payment become fixed, and you'll make monthly payments until the loan is paid off. The repayment term is usually 15 to 20 years.

Home equity loan

Home equity loans offer lump sum payments of cash to homeowners. You'll receive the loan proceeds upfront, then make payments over the loan term. Similar to personal loans, home equity loans offer a fixed rate and monthly payments that don't change each month.

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These loans are best for borrowers who know exactly how much they need and want a fixed monthly payment. These payments are more straightforward to budget for, and there aren't any surprises if interest rates increase.

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One downside is that you must be able to qualify for the full interest and principal payment. Home equity loan repayment terms are generally 5 to 15 years. However, you may be able to request a longer loan term of up to 30 years if the monthly payment is higher than you're comfortable with.

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Another downside is that you'll have to request another loan if you need extra money. This means you'll add a second loan or replace this loan with another to get the cash you need.

Home equity investment (HEI)

Tapping your home's equity is a good way to get cash. However, many homeowners cannot meet the bank's credit or income requirements, or they don't want another monthly payment to worry about. With a home equity investment (HEI), you get money from your home without proof of income, perfect credit or monthly payments.

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With an HEI, eligible homeowners receive a lump sum of cash from their home's equity. There are no monthly mortgage payments, but the HEI provider shares in your home's future appreciation. As your home increases in value, you and the lender both benefit.

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If your home's value falls, your buyback costs may be smaller. While you can buy back your equity at any time, you don't have to make any payments until you sell your home (or until the 30-year term expires).

Reverse mortgage

A reverse mortgage is a loan product designed for homeowners aged 62 and older who own their homes outright or have a low mortgage balance. These loans allow eligible borrowers to tap their home's equity without making any monthly mortgage payments, which makes them ideal for homeowners living on a fixed income. However, the homeowner is still responsible for property taxes, insurance, HOA dues, and home maintenance expenses.

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There are three payout options for a reverse mortgage - line of credit, lump sum or monthly installments. The type of loan you choose depends on your financial needs. Keep in mind that reverse mortgages often carry higher interest rates and charge higher origination fees than a traditional mortgage.

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Since you don't make monthly payments, the accrued interest is added to your loan balance. With that in mind, the amount to pay off a reverse mortgage will be more than the original loan balance.

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To get a reverse mortgage, the home must be your primary residence. A major downside is that the loan can be called due if you no longer live there for an extended period of time or when the owner passes away. Seniors who spend time in a hospital, nursing home, or assisted living center could be forced to sell their homes to pay off the reverse mortgage before they're ready. If your partner isn't on the loan or title, they could be left without a home if you're forced to sell to pay off the reverse mortgage.

Cash-out refinance

A cash out refinance is a traditional refinance that an existing mortgage with a new larger one. Even if you have paid off your original mortgage entirely, a mortgage that lets you cash out some of the home value is still referred to as a refinance. Depending on the new interest rate and the chosen term, the cost of a cash-out refinance will vary. Qualifying is similar to other conventional financing products – lenders will look at your DTI and credit score to determine whether you qualify. 

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Cash-out refinances typically cost the same as a traditional refinance. They also take the same amount of time (usually 30 to 45 days), so they are not a quick source of cash.

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If you start the clock on a new 30-year mortgage, keep in mind that this may have an impact on your future financial plans. Depending on your age, you may have mortgage payments past your projected retirement date.

Sale-leaseback

Selling your home allows you to unlock your home's equity without getting a new loan. However, when you sell your home, in most instances, you'll need to move elsewhere. With sale-leaseback, you sell the house to a new owner, then lease it from them at an agreed-upon rental rate.

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A sale-leaseback can be an appealing option for everyone involved. You get a lump sum of cash without moving out of your home. The buyer purchases a rental property with a built-in tenant. Your monthly rent helps pay for their mortgage while the house appreciates over time to build up their equity.

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While this situation may seem ideal, there are many downsides to be aware of. It can be difficult to find a buyer looking to turn the property into a rental instead of moving in themselves. Additionally, your fixed monthly mortgage payments may increase each year when the lease renews. At any time, the new owner may decline to renew your lease, and you'll have to find a new place to live.

How do I borrow money against my house that's paid off?

If your home is paid off, you can borrow against your home to get cash. To get a new loan, follow these steps.

• Assess your financial situation and how much you need. Avoid the temptation to borrow more money than you need. Taking a lower amount can keep your payments low and allow for a shorter repayment period.
• Compare lenders and products - prequalify where you can. Comparison shopping can lead to lower pricing and finding products that are a better match. Getting prequalified helps you understand rates and monthly payments before committing to the loan.
• Prepare and organize documents. Most lenders require supporting documents for your income, debts, credit, insurance and property taxes. Gathering this information ahead of time can speed up the loan process and allow quicker access to the cash.
• Formally apply. Once you've narrowed your choices and have your paperwork ready, submit your application to start the loan process. Attempt to respond to all requests within 24 hours to keep the lender moving toward closing the loan on time.

Frequently asked questions

How much can you borrow against a house you own?

The maximum loan amount depends on your home's value, the loan type, and your ability to repay the loan. Maximum loan-to-value (LTV) ratios vary among loan products but can go up to 100% for traditional mortgages or 85% for home equity loans and HELOCs. A home equity investment allows homeowners to get up to 70% of a home's value.

Can you get a home loan with bad credit?

Yes, there are loan programs for borrowers who don't have perfect credit. These loans typically have higher interest rates and fees, and they may include less appealing repayment terms. As your credit improves, you can refinance to obtain a mortgage with better terms. A home equity investment is an excellent option since borrowers can be approved with credit scores as low as 500.

Can you get a home loan with no income?

It is possible to get a home loan without income through a no-doc or stated-income mortgage. These loans do not require proof of income but often come with higher rates and fees due to the increased risk of default. Another option for people without income is a home equity investment. Homeowners cash out a portion of their home's equity, and no payments are required until you sell the house (or the 30-year term expires).

What is the best way to borrow against your home?

The best way to borrow against your home depends on your needs and ability to make payments. A HELOC offers flexibility and low payments, while a home equity loan offers a lump sum upfront, a fixed interest rate, and consistent payments. Home equity investments are excellent for people who don't want a monthly payment, cannot verify income, or may not have perfect credit.

What are the risks of using your home as collateral?

Taking cash out of your home's equity can be risky and impact your finances negatively. If you're unable to make loan payments on time, you could incur fees, penalty interest rates, and possibly lose your home. Additionally, tapping your home's equity affects the value of assets you may need in retirement.

Final thoughts

Getting cash out of your home's equity can be an inexpensive way to borrow. If your mortgage is paid off and you want to pull cash out, you may think, "I own my house outright and want a loan, but I'm unsure how to do it." Homeowners have multiple financing options to meet their borrowing needs and ability to repay. Compare the pros and cons of each option to determine which one is best for your situation.

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Ready to tap into your home equity with no monthly payments? Explore Point's Home Equity Investment and let your home wealth work for you.

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