I own my house outright and want a loan: What are my options?

After years of staying on top of your mortgage payments, you've paid it off. And while you might not be financially on the hook for monthly home loan bills, that doesn't mean your financing needs end.

You might find yourself needing a loan – maybe to make a big-ticket purchase, cover an unexpected bill, fund a business, or make home improvements. Even if you don't have a mortgage, there are many options to borrow money.

Here, we'll go over some of these opportunities, including borrowing against your home, and the pros and cons of each route.

What does it mean to own your home outright?

When you own your home outright, that means it's completely paid off and you don't owe any more monthly mortgage payments.

If you fully own your home, there are some pros and cons. Some advantages include more borrowing power and lower risk to lenders. That's because when your house is entirely paid off, you have 100% home equity, and can tap into most of your home value.

However, a downside is that a lot of your equity could be tied up to financing the new loan. So if you fall behind on your payments, the lender could seize your property.

Loan options at a glance

Let's say you find yourself saying "I own my house outright and want a loan." The good news is that there are a handful of options for you to consider.

Your loan options if own your house free and clear

If you own your home outright and need a loan, here are some financing choices you can mull over:

Home equity loans

A home equity loan on a house with no mortgage means you're borrowing against the equity in your home. Borrowing against your home equity means offering collateral to secure the loan. So if you fall behind on payments and can't keep up, the lender could use your home to repay the debt. You receive a lump sum up front, and you're responsible for fixed, monthly payments until the home loan is fully paid off.

Here are a few reasons this might be a strong choice for you:

• More borrowing power: Because you own your home fully outright, you can borrow against all of the equity in your home. In turn, you're likely qualified for higher amounts.
• Lower interest rates: Because your home equity loan is backed by your home, interest rates tend to be on the lower side.
• Fixed interest rates: Fixed interest rates mean predictable, steady payments throughout the life of your loan.
• Long loan terms: You can often borrow large sums of money with loan terms that range from 5 to 30 years.

Home equity line of credit (HELOC)

A home equity line of credit is a revolving line of credit where it's backed by the collateral in your home. Like credit cards, you can borrow money up to your credit limit, and repay as you go. HELOCs usually have a variable APR, which can move up and down.

A HELOC with no mortgage means you have greater borrowing power. Plus, don't have to worry about making payments on a mortgage and a HELOC at the same time.

Here are a few advantages of this financing option:

• Don't have to make payments during the draw period: Many HELOCs have a draw period, which is an initial period where you only have to pay interest on the money borrowed, and don't have to make principal payments. After the draw period, repayments start to kick in.
• Lower interest: Interest rates on HELOCs tend to have lower interest rates than other types of financing.
• Long repayment timelines: HELOCs usually have long timelines of anywhere from 5 to 25 years. This stretches out your payments and can make your payments more affordable.

Cash-out refinance

A cash-out refinance is when you take out another mortgage for a larger amount and pocket the "extra cash." You tap into your paid-for home's equity to spruce up your home, consolidate debt, or make a large, meaningful purchase.

Let's look at some benefits of a cash-out refinance:

• Flexible funds: The money from a cash-out refinance can be used for just about anything. You aren't restricted in how you use it.
• Access to a large amount of cash: Because you have access to a lot of equity in your paid-for home, you can tap into a sizable chunk of change. This means access to funds you might otherwise get approved for through other forms of financing.
• Potentially lower interest rates: You might be able to snag lower interest rates. This might be the case if interest rates have dropped since you last took out a mortgage.

Personal loan

A personal loan is a type of installment loan. In other words, you receive a large sum of funds upfront, and you're responsible for fixed payments throughout the life of the loan. Personal loans can have higher interest rates than say, a HELOC or home equity loan, but lower rates than credit cards.

Personal loans can be secured or unsecured. If the loan is secured, or backed by a valuable asset, like a car or home, then the loan amounts are usually higher and the interest rate lower. However, unsecured loans, which aren't backed by any collateral, tend to be more common.

Here are a few reasons why you might want to consider a personal loan if your mortgage is paid outright:

• Don't have to offer collateral: While you can get a secured personal loan, unsecured personal loans are more common. So if you don't want to risk losing your home by offering it as collateral, this might be the better option for you.
• Flexible in use: A common advantage of personal loans is that they're quite flexible in their use. They can be used for a variety of things – for home improvement projects, to consolidate debt, and even to fund higher education, a wedding, or vacation.
• Lower interest rates: Unsecured personal loans can have lower interest rates than a credit card, but higher interest rates than home equity loans or HELOCs.

Pros and cons of borrowing against a paid-off home

There are advantages and downsides when it comes to financing against a home that's fully paid off. Let's take a look at some of the pros and cons:

Pros

• Higher borrowing amounts: Because your mortgage is paid off, you're likely to borrow higher amounts. You have a lower LTV, which means you pose less of a risk to lenders.
• Lower interest rates: Because you have less DTI than if you were still paying off a mortgage, you can expect lower interest rates. Plus, HELOCs and home equity loans usually have lower interest rates.
• More flexible terms: Because these loans aren't considered "second mortgages" or take "second positions," they're deemed lower risk. You might qualify for more flexible terms and lower rates.

Cons

• Tempted to borrow more than needed: Just because you may qualify for larger loan amounts doesn't mean you should. However, because you might qualify for a higher HELOC or home equity loan doesn't mean you shouldn't necessarily borrow the maximum amount.
• Could lose your home: Because you're offering your home as collateral, you could risk losing it should you find yourself unable to keep up with your payments.

Alternatives to consider before seeking financing

Here are other options you should consider before taking a loan against your home:

• Downsizing and relocating: You can sell your current home, downsize to a smaller place, and relocate. The funds you profit from the sale of your home can be used for your financing needs.
• Getting a reverse mortgage: A reverse mortgage is a type of home loan where borrowers – usually those older than 62 – borrow a portion of the equity of their home. If you take out a reverse mortgage, you don't make monthly payments on your home. The loan is paid back when you no longer live there.
• Tapping into retirement funds: Depending on the use, you can take out a loan against your 401(k) or 403(b). You can take out at least 50% of the vested account balance or $50,000, whichever is less. You'll need to pay the amount borrowed back, plus interest, within 5 years.

You can also take out a withdrawal, such as a hardship withdrawal. While you're not on the hook for paying back the amount you take out, the money you take out is taxed as ordinary income. Plus, there's a 10% early withdrawal penalty.

FAQ

Here are the answers to some frequently asked questions about taking out a loan when you own the house outright:

Can I get a loan if I own my house outright but have bad credit?

You can take out a home loan  – like a home equity line of credit – if you own your house outright but have bad credit. Because you're borrowing against the equity in your home, you'll have an easier time. However, a lower credit score means you might be approved for lower loan amounts, higher interest rates and less favorable and flexible terms.

Is it better to get a personal loan or a home equity loan?

Whether a home equity versus a personal loan is the stronger choice depends on your situation. A home equity loan is usually easier to qualify for and tends to have lower interest rates. However, a personal loan doesn't require you to offer your home or valuable asset to secure the loan.

How much can I borrow against my home’s equity?

While it depends, many loans, such as home equity loans and home equity lines of credit require you to borrow up to 80% of your LTV. To figure out how much equity you have in your home, you can use a home equity calculator.

What disqualifies you from getting a home equity loan?

Factors that can disqualify you from getting a home equity loan are not enough equity in your home, unstable income, a poor credit score, high debt levels, and outstanding tax liens and judgments.

Do they inspect your house for a home equity loan?

When you apply for a home equity loan, lenders do require that you get an appraisal. That way, you can get an accurate property valuation.

The bottom line: You can tap into your home’s equity if it's paid off

There are many options to tap into your home's equity once it's fully paid off. And while there are many benefits to getting financing when you're mortgage-free, you'll also want to look at the downsides. That way, you can make an informed choice for your situation.

Consider applying for a home equity loan with applying for a home equity loan with Rocket Mortgage to help finance your needs today.

Refinancing may increase finance charges over the life of the loan.

Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.

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