Can You Take Out a Home Equity Loan on a Paid-Off House?

A home equity loan allows you to turn your equity into cash, which you can use for repairs, improvements, or any other expenses you might need to cover.

You may be able to get a home equity loan while you still have a balance on your first mortgage,  but it’s not guaranteed. Once your main mortgage is paid off, though, qualifying for a home equity loan is usually easier than ever.

Are you in need of cash and wondering, “how do I get a loan on a house that is paid for”? Here’s everything you need to know.

In this guide:

• How a paid-off house can improve your chances of getting a loan
• What home equity loans for a paid-off house are available?
• How to apply for a home equity loan if your house is paid off
• What are the benefits and downsides of taking out a loan on a paid-off house?
• Should you take out a loan on a paid-off house?

How a paid-off house can improve your chances of getting a loan

Your loan-to-value ratio (LTV)—or how much the loans against your house compare to its current value—is a large factor in whether you qualify for a home equity loan and how much you can borrow.

Generally speaking, the lower your LTV is, the less risky you are to lenders, and the easier it will be to get approved. Because of this, having your home paid off means that you don’t have an outstanding balance on a mortgage and that your LTV is likely zero. This is a good sign for lenders.

Most lenders allow you to access 80% to 85% of your home’s value—minus any mortgage balances you have. If you have no existing balance, you can borrow up to 85% of your home’s total value. On a home worth $400,000, for example, that’s equal to a lump-sum payment of up to $340,000 ($400,000 x 85%).

If you didn’t have a paid-off house and your mortgage was, say, $150,000, you’d only be able to access $190,000 (($400,000 x 85%) – $150,000).

Home equity loans for a paid-off house

If you own your home outright and need a loan, a home equity loan is just one option. You might also consider a home equity line of credit (HELOC) or a cash-out refinance.

Here’s what each of these options entails:

Using a HELOC on a paid-off house

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 good options if you’re not sure how much money you’ll need or if you have recurring expenses to cover.

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

The downside of HELOCs is they usually have variable interest rates, meaning your rate can increase over time. In some cases, lenders may offer fixed rates, but they’re not as common. Note: We’ve reviewed a lender that offers a HELOC with fixed rates in the section below.

Here’s a lender offering a HELOC for a paid-off house

Figure is a great option if you’re looking for an online lender that can get you your funds quickly. You have no obligation to use your total line of credit, and the funds can be used however you’d like. There are no closing costs or out-of-pocket costs.

If you’re unsure if Figure is right for you, you can pre-qualify—with no risk to your credit score—and get a free quote. This can help you evaluate whether the company’s HELOC is the best fit.

Here are some important details about the product:

	Figure HELOC
Fixed rates (APR)	4.24% – 11.16%
Rate discount	0.25% for autopay
Loan amounts	$15,000 – $400,000
Draw period	5 years
Repayment terms	5, 10, 15, or 30 years
Origination fee	Up to 4.99%
Max. LTV	95%
Min. credit score	640

Using a home equity loan on a paid-off house

A home equity loan is a little different from a HELOC. Instead of getting a credit line that you can use many times, home equity loans give you a one-time, lump-sum payment at closing.

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. Typically, home equity loan terms range from five to 30 years, depending on the lender.

Interest rates on home equity loans are usually fixed, so your rate or 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.

Here’s a lender offering a home equity loan for a paid-off house

If you’re eyeing a home equity loan on your paid-off house, Discover is an option. The bank offers credit cards, loans, online banking services, and more.

Here are some important details about the product:

	Discover home equity loan
Fixed rates (APR)	6.99% – 12.99%
Loan amounts	$35,000 – $300,000
Repayment terms	10, 15, 20, or 30 years
Origination fee	None
Max. LTV	90%
Min. credit score	620

Using a cash-out refinance on a paid-off house

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 an existing mortgage—just with a higher-balance one—and then pocket the difference between the two balances at closing.

If you don’t have a current mortgage, you can still do a cash-out refinance—and it might even mean a lower interest rate than other financing options can provide.

The downside, though, is that closing costs tend to be high on cash-out refinances, so make sure you have cash on hand to cover these. According to Freddie Mac, the average closing costs on a refinance are around $5,000.

Here’s a lender offering a cash-out refinance for a paid-off house

If you’re considering a cash-out refinance, SoFi might be an option. The online bank offers loans, credit cards, insurance, credit cards, and more. 

Here are some important details about the product:

	SoFi cash-out refinance
Rates (APR)	Not disclosed
Loan amounts	Not disclosed
Repayment terms	10, 15, 20, or 30 years
Origination fee	Not disclosed
Max. LTV	80%
Min. credit score	Not disclosed

How to apply for a home equity loan if your house is paid off

1. Find a lender

The first step to getting a home equity loan, HELOC, or cash-out refinance is to shop around for lenders. To do this, you’ll want to apply with at least a few banks, credit unions, online lenders, and other options to be sure 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 debts. This usually includes W-2s, tax returns, 1099s, bank statements, and more. You’ll also need to agree to a credit check, which allows them 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 they’ll calculate your LTV and how much equity you have to access.

4. Close on your loan

Finally, 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’ll usually see the lump-sum payment 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.

What are the benefits and downsides of taking out a loan on a paid-off house?

As with any financial move, there are both advantages and drawbacks to taking out a loan against a fully paid-off house.

The benefit is access to a large amount of cash for any use. It will be fairly easy to qualify since you have a low LTV. Because the loan is secured by collateral (your house), you may also get a lower interest rate than you would on other financial products.

The downside, though, is that you’ll be required to make monthly payments. You’ll also have to cover closing costs and, if you can’t make your payments, could be at risk of losing your house.

PROS	CONS
Access to large amounts of cash	Comes with closing costs
Lower interest rates than other financial products	Could put your home at risk of foreclosure
Can use the funds for anything	You’ll have to make monthly payments

Should you take out a loan on a paid-off house?

Owning your home in full can make it easy to access cash when you need it without having to sell your house or pay sky-high interest rates like you would on a credit card.

Still, it’s not right for everyone. There are closing costs, and the loan will use your house as collateral, so if you’re not sure you can make the new monthly payments—or if it would strain you financially—it might not be the best move.

If you do 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—should you lose your job.