Can You Mortgage a House You Already Own?

Homeowners often leverage their property’s value to meet financial needs. A house already owned can serve as collateral for new financing, transforming accumulated equity into accessible funds. This allows individuals to tap into their home’s built-up value without selling the property.

Types of Loans to Access Home Equity

Several financial products allow homeowners to convert home equity into liquid funds. Each option offers distinct features regarding fund disbursement, interest rates, and repayment structures.

Home Equity Loan (HEL)

A Home Equity Loan (HEL) functions as a second mortgage, providing a lump sum of cash. It is secured by the home’s equity, which is the difference between the property’s market value and the outstanding mortgage balance. Repayment involves fixed installments over a predetermined period, typically ranging from five to 30 years. HELs usually carry a fixed interest rate, meaning monthly payments remain consistent. Interest paid on a home equity loan may be tax-deductible if funds are used to buy, build, or substantially improve the home that secures the loan.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) operates as a revolving line of credit. Unlike a HEL, a HELOC does not provide a lump sum upfront; instead, it allows homeowners to borrow funds as needed, up to an approved credit limit. A HELOC typically has two phases: a “draw period,” during which funds can be accessed (often 10 years), and a “repayment period” (often up to 20 years), during which the outstanding balance is repaid with principal and interest. Interest rates on HELOCs are typically variable, meaning they can fluctuate based on market conditions, though some lenders may offer fixed-rate options for portions of the balance. Similar to home equity loans, the interest on a HELOC may be tax-deductible if the borrowed money is used for home acquisition or improvement.

Cash-Out Refinance

A cash-out refinance involves replacing an existing mortgage with a new, larger mortgage. The new loan covers the remaining balance of the original mortgage, and the difference is provided to the homeowner as a lump sum of cash. This option typically results in a new interest rate and a new loan term for the entire mortgage balance. The funds obtained from a cash-out refinance can be used for various purposes, such as home improvements, debt consolidation, or other significant expenses. While it offers a way to access a substantial amount of cash, it also means taking on a larger mortgage with potentially higher monthly payments.

Key Requirements for Loan Approval

Securing approval for a home equity loan, HELOC, or cash-out refinance depends on meeting specific lender criteria. These requirements assess a borrower’s financial stability and the property’s value.

Loan-to-Value (LTV)

Lenders evaluate the Loan-to-Value (LTV) ratio, which compares the amount of the loan to the appraised value of the home. For home equity loans and HELOCs, lenders generally allow borrowing up to a combined LTV of 80% to 95% of the home’s value, minus any existing mortgage balance. For cash-out refinances, lenders typically require homeowners to maintain at least 20% equity in their home after the refinance. A home appraisal is usually required to determine the property’s current market value, which directly impacts the available equity.

Credit Score and DTI

A strong credit score is important for loan approval and securing favorable interest rates. While minimum credit score requirements can vary by lender, a score in the mid-600s or higher is generally expected for HELOCs, and often 620 or higher for home equity loans and cash-out refinances. Lenders also examine the Debt-to-Income (DTI) ratio, which is the percentage of a borrower’s gross monthly income that goes towards debt payments. Many lenders prefer a DTI ratio of 43% or less, though some may approve ratios up to 50% depending on other qualifying factors.

Income Verification

Income verification is a standard requirement, as lenders need to confirm a borrower’s ability to repay the loan. This typically involves submitting documentation such as recent pay stubs, W-2 forms, and federal income tax returns for the past two years. Self-employed individuals generally need to provide more extensive financial records, including business tax returns and profit and loss statements. Lenders also require property information, including the address and type of property, to facilitate the appraisal and title search processes.

The Application and Closing Process

After evaluating loan types and gathering necessary financial information, the next phase involves the formal application and subsequent closing procedures.

Application Submission

Initiating a loan application can be done through various channels, including online platforms, in-person visits to a lender’s branch, or by working with a mortgage broker. Upon submission, lenders are required by the TILA-RESPA Integrated Disclosure (TRID) rule to provide a Loan Estimate within three business days. This document outlines the estimated loan terms, projected payments, and estimated closing costs, allowing for comparison shopping.

Underwriting and Approval

The application then moves into the underwriting phase, where the lender thoroughly reviews submitted financial documents and property details. This includes ordering an independent appraisal to confirm the home’s value and conducting a title search to ensure no undisclosed liens or claims against the property. The lender also performs a comprehensive credit review to assess the borrower’s creditworthiness. Once underwriting is complete and the loan is approved, the lender issues a Closing Disclosure at least three business days before the scheduled closing date. This final document provides the exact loan terms, final payments, and all closing costs.

Closing

The closing process involves signing numerous legal documents to formalize the loan agreement. Closing costs, which typically range from 2% to 5% of the loan amount for home equity loans, HELOCs, and cash-out refinances, cover various fees such as origination fees, appraisal fees, title insurance, and attorney fees. These costs can sometimes be rolled into the loan amount or paid out-of-pocket. Upon successful signing and payment of closing costs, the funds are disbursed to the borrower, completing the transaction.