I own my home outright and need a loan
If you own your home outright — with no current mortgage — its value is all equity. You can tap that equity by taking out a loan against the home’s value.
There are several mortgage loan options available when you already own your home, including a cash-out refinance, home equity loan, or HELOC. So do your research and choose the best one based on your goals.
In this article (Skip to...)
- Can I get a loan?
- How it works
- What’s the right mortgage?
- Mortgage options
- Second home interest rates
- Is it right for you?
Can I get a loan on a house that’s paid for?
When you own your house outright, you can use a variety of mortgage loans to borrow against your home’s value. Good options to tap your equity at a low rate include cash-out refinancing, home equity loans, and home equity lines of credit (HELOCs).
- Cash-out refinance: In most cases, you can borrow up to 80% of your home’s appraised value. You’ll repay the loan via monthly payments, just like you did before you paid off your mortgage balance
- Home equity loan: These loans work like a personal installment loan but with your home value serving as collateral. Home equity loans have lower fixed interest rates compared to personal loans
- Home equity line of credit (HELOC): These loans resemble credit cards because you access money as needed and repay only what you’ve borrowed. But since they’re backed by your home value, rates are much lower than credit card rates. HELOC rates are typically variable rather than fixed
With any of these loans, you can benefit from your home’s value without selling the house.
How to get a mortgage on a house you already own
Getting a mortgage on a house you already own lets you borrow against the value of your home without selling.
The type of loan you’ll qualify for depends on your credit score, debt-to-income ratio (DTI), loan-to-value ratio (LTV), and other factors.
But assuming your personal finances are in good shape, you can likely choose from any of the following loan options that we summarized above:
1. Cash-out refinance
Cash-out refinancing typically involves applying for a new mortgage to replace an existing mortgage and borrowing cash from your home equity in the process. When you already own your home outright, you aren’t paying off an existing mortgage, so most or all of the loan will come to you as a lump sum of cash.
You can typically borrow up to 80% of your home’s value using a cash-out refinance. With the VA cash-out refi you could potentially get up to 100% of your home’s value, but only veterans and active duty service members have VA loan eligibility.
Refinancing requires a home appraisal to measure your home’s market value. (Unless your home is worth over $1 million, in which case you may be able to get an appraisal waiver.) You’ll also pay closing costs, which can range between 2% and 5% of your loan balance.
You can pay closing costs out of pocket, or your lender might be willing to cover part of them in exchange for a higher interest rate. Alternatively, you could roll the closing costs into your loan balance.
Cash-out refinancing typically requires a credit score of at least 620. But a higher score (720 and up) will earn you a lower mortgage rate and help you save on interest costs.
2. Home equity loan
Another option is a home equity loan. As with a cash-out refinance, the amount you can borrow is based on your home’s value. Your loan terms will also depend on your credit score.
Homeowners can typically borrow up to 80% of their home’s equity with a home equity loan, which is also known as a second mortgage. However, some smaller banks and credit unions may allow you to pull out up to 100% of your equity.
Once you’re approved, you’ll receive the entire loan amount in cash to use as you wish. Then you’ll repay the loan, with interest, by making monthly payments.
Home equity loans have higher interest rates compared to refinancing, but lower interest rates compared to a credit card or a personal loan. Since it’s an installment loan with a fixed interest rate, you’ll also have a fixed monthly payment.
Many lenders set their minimum credit score for a home equity loan between 620 and 700.
3. Home equity line of credit (HELOC)
A home equity line of credit is similar to a home equity loan. But rather than receiving a lump sum of cash, borrowers get access to a line of credit to draw from as needed.
Home equity lines of credit often have a draw period of 10 years, meaning you can borrow from the credit line and repay it, as often as you want, within that time frame. After the draw period ends, there’s typically a repayment period of up to 20 years when you cannot borrow from the HELOC and must repay any outstanding balance with interest.
A HELOC is a revolving account, like a credit card, so the amount borrowed determines your monthly payment. HELOCs usually have variable interest rates.
What’s the right type of loan based on your goals?
Although you have several loan options when you already own your home, the right mortgage depends on your specific goals.
I need cash to buy another property
Are you thinking about buying more real estate, like a second home, vacation home, or investment property? If so, you’ll likely need cash for a down payment and closing costs.
You can use your own funds, of course. But if you’re short on cash — or you don’t want to touch your personal savings or other investments — a cash-out refinance or a home equity line of credit can help you buy another property.
The benefit of using a cash-out refi to buy another home is that you can lock in a low fixed rate. But it requires you to refinance a portion of your home’s current value. So you’ll have a larger loan amount and pay interest for a longer time — likely 30 years.
A home equity line of credit (HELOC) lets you tap only the amount of cash you need. You can also pay the money back and then reuse the credit line. This lets you borrow -– and pay interest on — only the sum you really need.
On the flip side, HELOCs can have higher interest rates than cash-out refinancing, and the rate is often variable, which leaves you with less certainty about your future rate and monthly payments.
I want to make home improvements or repairs
Looking to improve your home by making renovations or repairs? Borrowing against your home’s equity with a home equity loan or a HELOC can generate the money you need.
A home equity loan is great if you need an exact amount for a single project. A HELOC is better when completing several projects over the course of many years since you’re able to tap your equity as needed.
You can use a cash-out refi for home improvements, too — especially if you’re interested in getting the lowest interest rate. But again, the drawback is that you’ll have to finance most of your home value and pay interest over 30 years.
See this comparison of the best home improvement loans for more information.
I want to consolidate high-interest debts
If you’ve already paid off your first mortgage, you probably have enough equity to pay off all your high-interest debts, like credit card debt or personal loans. This is typically done using a cash-out refinance. You tap your home equity, use it to pay off existing debts, and then effectively repay them to your mortgage lender at a much lower interest rate.
This can be a very smart way to save money on interest, especially when your mortgage interest is tax-deductible. But experts warn that using a cash-out refinance for debt consolidation has risks, too.
Remember that the new loan is secured against your home. So if you run the debts back up and can’t make loan payments, there could be a risk of foreclosure. Also, you’d be using a long-term asset, the value of your real estate, to pay for shorter-term needs.
I own a home with no mortgage balance and want to buy another house
Mortgaging your current home isn’t always necessary when buying a second home, vacation home, or investment property. “You may already have enough savings for a down payment without tapping into your equity,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Before getting a mortgage on a house you already own, look into mortgage loans that allow low down payments. Home buyers should consider the following types of loans.
If you’re buying a new home to use as your primary residence, conventional loans allow financing with as little as 3% down payment. And you could qualify with a credit score as low as 620.
If you’ll remain in your current home full-time, and plan to use the new property as a vacation home, you’ll need at least 10% down. And you’d need 20% down to avoid private mortgage insurance premiums (PMI).
If you’re purchasing a rental or investment property, you’ll typically need to put 20% to 25% down for a conventional loan. You’ll also need a slightly better credit history with a credit score of 640 or higher.
VA loans are typically the best option for eligible veterans and service members. They have low mortgage rates, no mortgage insurance during the life of the loan, and don’t require a down payment.
Unfortunately, you can’t buy a vacation home or investment property with a VA loan. You must be buying a home you plan to live in full-time. The only exception is when buying a multi-unit property with up to four units. You can live in one of the units and rent out the others.
You can also use a VA loan to buy a second home, but only if you’re moving. If the second home becomes your primary residence, you can rent out your former home and use this rental income to pay the mortgage on your new home.
FHA loans require only a 3.5% down payment and underwriting favors borrowers with average credit: FHA loans allow FICO scores as low as 580.
Just like VA loans, you cannot use an FHA loan to purchase a vacation home or an investment property. But you can use one to buy a multi-unit property with up to four units, live in one of the units, and rent out the others.
You can also use an FHA loan for a home you plan to move into. However, prepare to explain to your loan officer or mortgage broker why you are leaving your current home. In order to use FHA for a second home, you need to be moving into a property that is more suitable for your financial situation.
For instance, say your current home has two bedrooms and you need four. Or, the new home is substantially closer to work. If you don’t have a good reason, you likely won’t be able to use FHA if you currently own a satisfactory home.
The main benefit of FHA financing is its flexible credit guidelines. The downside is that these loans come with expensive mortgage insurance. If you have a good credit score and at least 3% down, we’d recommend looking into a Freddie Mac or Fannie Mae conventional mortgage first.
Interest rates for a second home
If you’re using cash from your equity to buy another home, make sure you understand how interest rates work on a vacation home, second home, and investment property.
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 properties have a higher risk of default.
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.
But although you’ll pay a higher rate when buying a second home, shopping around and comparing loans can help you save. To see the impact of higher mortgage rates, you can experiment with a mortgage calculator.
Whether you’re purchasing another home, or getting a cash-out refi, home equity loan, or home equity line of credit, make sure you request quotes from at least three mortgage lenders. Compare interest rates as well as discount points and upfront fees.
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, though, 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 their equity and use the money for many different purposes.
Make sure you understand the pros and cons of each type of financing and choose the best one for you based on your specific goals.