Can I Get a Mortgage on a House I Already Own?

Homeowners often seek ways to access the financial value built within their property, even if they already hold clear title or have an existing mortgage. This strategy allows individuals to convert home equity into available funds. These funds can then be allocated for various purposes, such as home improvements, educational expenses, or debt consolidation.

Cash-Out Refinancing

Cash-out refinancing involves replacing an existing mortgage with a new, larger loan. The difference between the new loan amount and the old mortgage balance is disbursed to the homeowner in cash. The amount of cash available is determined by the home’s appraised value and the homeowner’s existing mortgage debt.

Lenders establish a maximum loan-to-value (LTV) ratio, which is the percentage of the home’s appraised value they are willing to finance. For conventional cash-out refinances, this LTV limit is 80%, meaning the homeowner must retain at least 20% equity after the refinance. This calculation involves multiplying the home’s appraised value by the maximum LTV percentage, then subtracting the outstanding balance of the original mortgage. For instance, a home valued at $400,000 with a $200,000 existing mortgage and an 80% LTV limit could yield up to $120,000 in cash. Government-backed loans, such as FHA and VA cash-out refinances, may allow LTVs up to 95% or even 100% of the home’s value.

Home Equity Loans

A home equity loan functions as a second mortgage, enabling homeowners to borrow a fixed sum of money against their property’s equity. Unlike a refinance that replaces the primary mortgage, this loan exists alongside any existing first mortgage. The funds are provided as a single, upfront lump sum, offering immediate access.

This type of loan features a fixed interest rate. Borrowers have a fixed repayment schedule, with consistent monthly payments over a predetermined term, often ranging from 5 to 30 years. Lenders allow homeowners to borrow up to 85% of their home’s equity through a home equity loan.

Home Equity Lines of Credit

A Home Equity Line of Credit (HELOC) operates as a revolving line of credit. Homeowners can borrow money as needed, up to a pre-approved credit limit, similar to how a credit card functions. This structure allows for multiple draws and repayments over time.

HELOCs involve two phases: a draw period and a repayment period. During the draw period, which lasts between 5 and 10 years, borrowers can access funds and often make interest-only payments. Following the draw period, the loan transitions into a repayment period, spanning 10 to 20 years, where payments include both principal and interest.

The interest rates on HELOCs are variable, meaning they can fluctuate based on a specified financial index, such as the Prime Rate, plus an additional margin set by the lender. Some lenders offer options to convert all or a portion of the outstanding balance to a fixed interest rate during the draw period, providing more predictable payments. Like home equity loans, HELOCs are considered second mortgages on the property.

Reverse Mortgages

A reverse mortgage is a financial product designed for older homeowners, typically those aged 62 or more, though some private lenders offer options for individuals as young as 55. This loan allows homeowners to convert a portion of their home equity into cash without selling their property or making regular monthly mortgage payments. Its primary purpose is to provide financial flexibility during retirement.

The loan balance on a reverse mortgage grows over time as interest and fees accrue. Repayment of the loan becomes due when the last borrower moves out of the home, sells the property, or passes away. To maintain the loan, borrowers are required to live in the home as their primary residence, pay property taxes, maintain homeowner’s insurance, and maintain the home.

Key Application Requirements

Applying for a cash-out refinance, home equity loan, or Home Equity Line of Credit (HELOC) involves meeting financial criteria and providing documents. Lenders assess an applicant’s financial health to determine eligibility and loan terms. These requirements help ensure the borrower’s capacity to repay the debt.

A strong credit score is necessary, with lenders seeking a minimum of 620 for conventional loans, while scores of 680 to 740 or higher can lead to better interest rates. Lenders evaluate the debt-to-income (DTI) ratio, which compares monthly debt obligations to gross monthly income; a DTI between 43% and 50% is required. Another important factor is the amount of equity in the home, with lenders requiring at least 15% to 20% equity for home equity loans and HELOCs, and mandating that at least 20% equity be retained after a cash-out refinance.

Applicants will need to provide documentation. This includes proof of income, such as recent pay stubs, W-2 forms from the past two years, and individual tax returns. Self-employed individuals submit 1099 forms or profit and loss statements. Lenders require asset statements, including bank statements and sometimes investment account statements. Valid photo identification (e.g., a driver’s license) and proof of Social Security number are standard requirements.

A home appraisal is a necessary step in the application process. A licensed appraiser conducts an assessment of the property’s market value. This valuation ensures the loan amount aligns with the home’s worth, providing collateral for the lender. The appraisal helps lenders mitigate risk by confirming the property’s value can support the requested loan amount.