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If your house is paid off and you need access to funds, you can likely get a home equity loan assuming you meet the other eligibility requirements.
A mortgage and a home equity loan are two separate loans, so a homeowner does not need to have a mortgage in order to get a home equity loan. In most cases, having a paid-off house can actually help your chances of getting approved for a home equity loan.
A home equity loan is a type of loan in which the borrower’s home serves as collateral for the borrowed funds. It is a secured loan that allows borrowers to access some of the funds from the equity built up in their homes.
The amount you can borrow will depend on a variety of factors including your loan-to-value ratio, credit history, and debt-to-income ratio.
On this page:
- How Your Loan-to-Value (LTV) Affects Your Ability to Get a New Loan
- Home Equity Loans for a Paid-Off House
- How to Apply for a Home Equity Loan After Your Home is Paid Off
- Alternative Loans Options for Paid-Off Houses
How Your Loan-to-Value Affects Your Ability to Get a New Loan
Loan-to-value (LTV) is a ratio that lenders use when they consider underwriting a new loan. The ratio is calculated as the current outstanding loan balance divided by the market value of the property. The difference between the loan amount and the value of your home is the equity stake that the owner has in the property.
When you first purchase a property and take out a new mortgage, you might have around an 80% loan-to-value ratio with a 20% down payment.
Lenders consider lower loan-to-value ratios to be less risky. When you have paid off your home, your loan to value ratio is 0% because you have 100% equity ownership in the home and no outstanding loan balance. This is the least risky situation from the perspective of the lender.
Home Equity Loans for a Paid-Off House
The companies below offer home equity loans or lines of credit to those with a paid-off house.
4.99% – 13.75% APR
$15,000 – $150,000
Figure offers a home equity line of credit that can be taken out on a paid-off house. If you need funding quickly, Figure is a good option. The company can fund your loan within 5 days, one benefit of using an online lender.
You can get pre-qualified without any impact on your credit score. If you are satisfied with the loan terms, you can complete the loan application entirely online in minutes.
- Maximum loan-to-value: 95%
- Rate reduction: 0.75% automatic payment discount
- Fees: Origination fee 0% – 4.99%
- Draw term: 5 years
- Repayment terms: 5, 10, 15, or 30 years
As low as 5.205% APR
$20,000 – $500,000
Spring EQ offers a home equity loan that can be used on a paid-off house. If you are in need of a large loan, Spring EQ may be your option with loan amounts up to $500,000. Funds can be received in as little as 11 days, but the average customer receives their funds in 18 days.
- Maximum loan-to-value: 100%
- Fees: An appraisal fee, administration fee, documents fee, and a $700 – $2,000 origination fee
- Repayment terms: 5 – 30 years
How to Apply for a Home Equity Loan After Your Home is Paid Off
You can apply for a home equity loan or HELOC by visiting a local lender’s branch office or filling out an online application. You’ll need to provide the same types of documentation that you do when you apply for a mortgage.
Along with the information on your application and your credit report, the lender will want to see your pay stubs, W-2 forms, documentation of other sources of income, and the most recent monthly statements on all outstanding debts. The lender will also want to obtain an appraisal report in order to determine the current market value of the property, as well as at least 2 years of tax returns.
The lender will evaluate your credit history and total outstanding debt payments as part of the underwriting process to see if you meet the requirements. This is where it will help you to have paid off your home.
You established good borrowing behavior by paying off the debt, you no longer have that debt adding to your overall debt calculation, and you will be able to access the maximum amount of money that could be available based on the current market value of your property.
Here’s How it Works
This example shows how a lender evaluating an application for a home equity loan uses a loan-to-value calculation called a combined loan-to-value (CLTV) ratio. This ratio adds the combined amount of outstanding debt from the mortgage and home equity loan and then divides that amount by the total property value:
CLTV = (outstanding balance on mortgage + outstanding balance on home equity loan) / home value
CLTV x home value = total outstanding balance on mortgage and home equity loan
Lenders generally don’t want the CLTV to exceed 85%. So, if you have a home value of $250,000 and have paid off your home, you could potentially borrow up to $212,500 with a home equity loan.
0.85 x $250,000 = $212,500
On the other hand, consider a situation where you have not paid off your home. Assume you have an outstanding mortgage balance of $150,000 on that $250,000 home. The calculation above showing the maximum dollar amount of your combined loans has not changed. You can still have a combined outstanding balance of $212,500. Now, however, that has to include your mortgage balance of $150,000. What’s left over is the maximum dollar amount you can borrow in a home equity loan: $62,500.
$212,500 – $150,000 = $62,500
If you’ve been thinking to yourself, “My house is paid off, can I get a loan?” you can now see why having no mortgage can help you qualify.
However, it is important to mention that even though there is an allowable amount to borrow, you should not borrow more than is needed for the purpose of the loan. You should also be aware of closing costs since most home equity loans and HELOCs have these.
Alternative Loan Options for Paid-Off Homes
If you don’t want to take out a home equity loan or HELOC, or if you don’t qualify, there are a few alternatives you could consider.
Even if you don’t have a remaining mortgage balance, you can still do a cash-out refinance. With this, you take out a new mortgage on your home in exchange for cash.
For example, you may take out a new mortgage on your home for $100,000 but you would also receive a $100,000 lump sum. You would then make monthly mortgage payments for a set amount of time.
Interest rates are typically low on cash-out refinances, especially if you have a good credit score. However, you may pay higher closing costs than you would with a home equity loan or HELOC.
If you don’t want to risk losing your home, you may want to consider a personal loan. These are typically unsecured but have higher interest rates than home equity loans and cash-out refinances.
A personal loan works like any other loan. You are given a lump sum upfront and repayment it in monthly installments plus interest.
If you have good credit, you can likely qualify for a personal loan with a rate under 10%. If you don’t, however, you will likely pay more making this an expensive alternative.
Author: Kimberly Goodwin, PhD