How to Get a Loan on a House That Is Paid Off

A fully paid-off home represents a significant asset that can be accessed without selling the property. For homeowners seeking to convert this accumulated wealth into usable funds, various financial products are available. These options allow individuals to leverage home equity for diverse needs, such as home improvements, debt consolidation, education, or retirement expenses. Understanding the characteristics of each loan type is essential for making an informed decision that aligns with personal financial goals.

Home Equity Loan

A Home Equity Loan (HEL) functions as a second mortgage, allowing homeowners to borrow against their property’s equity. Unlike a primary mortgage, a HEL provides a lump sum upfront, repaid over a fixed term with a fixed interest rate. This predictability aids budgeting.

Lenders typically determine the loan amount based on a percentage of the home’s appraised value, minus any existing mortgage balances. Even with a paid-off home, lenders usually cap the loan at around 80% to 90% of the home’s value, meaning a portion of the equity must remain untouched. For example, if a home is valued at $400,000, a lender might allow borrowing up to $320,000 (80% LTV). The repayment period for a HEL often ranges from 5 to 30 years, with equal monthly installments covering both principal and interest.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) offers a revolving line of credit secured by home equity, similar to a credit card. Homeowners are approved for a maximum credit limit and can draw funds as needed during a “draw period,” commonly lasting 5 to 10 years. During this phase, borrowers typically make interest-only payments.

Once the draw period concludes, the HELOC transitions into a “repayment period.” Borrowers can no longer access funds and must begin making principal and interest payments. HELOCs often feature variable interest rates, meaning payments can fluctuate based on market conditions. The amount available is generally limited to 80% to 90% of the home’s appraised value, factoring in any outstanding mortgage, similar to a HEL.

Cash-Out Refinance as a New Primary Mortgage

A cash-out refinance on a fully paid-off home involves obtaining a new, larger primary mortgage. A portion of the new loan amount is disbursed directly to the homeowner as cash. The new loan becomes the primary lien against the property.

This type of refinance typically comes with a fixed interest rate, providing stable monthly payments over the loan’s term, which can extend up to 30 years. Lenders generally allow borrowers to access up to 80% of the home’s appraised value through a cash-out refinance. For instance, if a home is valued at $500,000, a cash-out refinance might provide up to $400,000 in a new mortgage, with the cash disbursed directly to the homeowner after closing costs.

Reverse Mortgage

A reverse mortgage is a specialized financial product designed for homeowners aged 62 or older; some proprietary products may be available to those 55 and older. This option allows individuals to convert home equity into cash without making monthly mortgage payments. Homeowners remain responsible for property taxes, homeowners insurance, and home maintenance.

Funds can be received in various ways, including a lump sum, a line of credit, or regular monthly payments. The loan generally becomes due and payable when the last borrower permanently leaves the home, whether due to selling the property, moving out, or passing away. A significant requirement for Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage, is mandatory counseling by a HUD-approved counselor to ensure borrowers understand the product’s implications.

General Lending Criteria

Lenders evaluate common criteria for home-secured loans to assess eligibility and determine terms. A strong credit score is typically required, with conventional loans often seeking a minimum of 620 to 640, though higher scores (e.g., 700-740+) generally lead to more favorable interest rates. The debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income, is also a critical factor; lenders commonly prefer DTI ratios below 43%, though some may accept up to 50% depending on other factors.

The home’s appraised value plays a central role in determining the loan amount, as it establishes the available equity. Lenders will order an independent appraisal to ascertain the current market value of the property. Additionally, verification of stable income and employment history, typically for at least two years, is standard practice to ensure the borrower’s capacity to repay the loan.