Own Your Home Outright? Best Loan Options for 100% Equity

It’s possible to get a loan on a house that’s fully paid for. Your options include a home equity loan, home equity line of credit (HELOC), and cash-out refinance. Because you own 100% of the equity in your home, lenders may view you as a lower risk, which can increase your chances of securing these types of loans.   

Table of Contents

1. I own my home outright and need a loan; what are my options?
2. Other eligibility requirements when your home is paid off
3. How to apply
4. Pros and cons of taking out a loan on a paid-off house
5. Is it a good idea to take out a loan?

I own my home outright and need a loan; what are my options?

Homeowners have several options for accessing their home equity. These include a home equity loan, HELOC, and cash-out refinance. Each offers unique borrowing features, such as when and how you can access your loan funds. 

Home equity loans (HELOANs)

A home equity loan gives you a one-time lump-sum payment at closing. The amount you can borrow is based on the amount of home equity you have—in this case, 100%. Compared to homeowners who still have a mortgage, your loan amount may be larger. 

With a home equity loan, repayment looks much like it does on your first mortgage. You’ll pay the loan back—plus interest—monthly until the entire loan is paid off. Typical home equity loan terms range from five to 30 years, depending on the lender.

Interest rates on most home equity loans are fixed, so your rate and payment won’t jump over time. Because they’re secured by collateral (your house), they also tend to have lower rates than other types of loans and credit cards.

Home equity lines of credit (HELOCs)

A HELOC is a type of mortgage that works like a credit card. It turns your equity into a line of credit, which you can withdraw from as needed over an extended period. These can be solid options if you’re not sure how much money you’ll need or if you have recurring expenses.

Most HELOCs require interest-only payments until your draw period ends—often 10 years. After that, you’ll begin making full interest and principal payments to the lender.

Many HELOCs have variable interest rates, which can fluctuate over time. However, several lenders offer fixed rates.

Keep in mind that some lenders offer HELOCs that work similarly to home equity loans. Figure, for example, requires that you withdraw the full amount of your line of credit, though you can pay it back and keep withdrawing funds during the draw period.  

Cash-out refinance

A cash-out refinance is another way to leverage the equity you have in your house. Typically, you’d use a cash-out refinance to replace your mortgage with a new one at a higher balance and pocket the difference between the two balances at closing.

If you don’t have a mortgage, you can still use a cash-out refinance—and it might even mean a lower interest rate than other financing options. The loan amount will be paid out to you instead of a mortgage lender first. 

However, closing costs tend to be high on cash-out refinances, so make sure you have cash on hand to cover them. According to Freddie Mac, the average closing cost on a refinance is around $5,000.

Other eligibility requirements when your home is paid off

Your loan-to-value ratio (LTV)—or how much the loans against your house compare to its current value—is also a significant factor in whether you qualify. Having your home paid off means you don’t have an outstanding balance on a mortgage, and your LTV is likely zero. This is a terrific sign for lenders.

But having this equity in your home is not the only eligibility requirement.

Lenders still want to ensure that you’ll be able to repay the loan you take out.

They’ll look at your financial profile holistically and see whether you meet other minimum requirements, such as:

• Debt-to-income ratio (DTI): This measures the percentage of your gross income going towards debt payments
• Credit score: Many lenders look at your score and credit history to assess the chances of you paying back your loan on time. 

Most lenders allow you to access 80% to 85% of your home’s value—minus any mortgage balance. If you have no balance, you can borrow up to 85% of your home’s total value.

• On a home worth $400,000, that’s a lump sum of $340,000 ($400,000 x 85%).
• If you didn’t have a paid-off house and your mortgage was $150,000, you’d only be able to access $190,000 [($400,000 x 85%) – $150,000].

How to apply

You can apply for a home equity loan, HELOC, or cash-out refinance in four general steps.

1. Find a lender

First, shop around for lenders. Apply to banks, credit unions, online lenders, and other options to ensure you get the best deal.

2. Apply and submit the required documentation

Your lender will require various financial documents to prove your income, assets, and debt. This might include W-2s, tax returns, 1099s, bank statements, and more. You’ll also need to agree to a credit check, which allows the lender to evaluate your payment habits and history with debt.

3. Get an appraisal

The lender will order an appraisal of your house to determine its current market value. This is how it calculates your LTV and how much equity you can access.

4. Close on your loan

You’ll attend a closing appointment, where you’ll pay your closing costs and sign your loan paperwork.

If you’re getting a home equity loan or cash-out refinance, you should see the lump sum in your bank account within a few days. With a HELOC, you should get a debit card and a checkbook that allows you to access your credit line.

Pros and cons of taking out a loan on a paid-off house

As with any financial move, consider the advantages and drawbacks of taking out a loan against a paid-off house.

Pros

• Access to large amounts of cash

• Lower interest rates than many other financial products

• Use the funds for any purpose

Cons

• Comes with closing costs and fees

• Could put your home at risk of foreclosure if you default on the loan

• You’ll need to make monthly payments

Is it a good idea to take out a loan?

Owning your home in full can make it easy to access cash when you need it without selling your house or paying sky-high interest rates like you would for credit cards. For example, it may be wise if you need a large amount of cash to make home repairs or renovations.

Still, it’s not right for everyone. Closing costs can be high, and the loan will use your house as collateral, so if you’re unsure whether you can make the new monthly payments—or if it would strain your finances—give it plenty of thought. 

For example, if you want to consolidate your credit card debt, consider how you plan to repay your loan while juggling your other financial obligations. If you don’t plan to close your credit cards, ensure you have a strategy in place so you’re not using them and risking further debt. 

If you opt to take out a loan against your home, map out a monthly budget to ensure you have the cash to cover your payments. You should also have enough savings to cover your closing costs—plus a few months of expenses in an emergency fund.