Finance

I Own My House Outright and Want a Loan: Your Options

July 27, 2023

After you’ve paid the last monthly mortgage payment (or inherited a property free and clear), a home is yours to do with as you choose. It can be an investment for the future, a business opportunity, security for a loan, a home for you and your family, or all of the above.

If you’re thinking, “I own my house outright and want a loan,” then you’re in the right place.

There are multiple ways to borrow against it or even leverage your equity debt-free. Let’s explore these.

Understanding Your Equity

Equity refers to the fully owned value of your property at a given point in time, calculated as its current market value less the amount you still owe on the mortgage.

If you own your home outright, then you own 100% of its equity. That means the dollar value of your equity will be the same as the current market value of your home.

The Pros and Cons of Leveraging Home Equity

Equity puts you in a power position to take advantage of opportunities, but it’s not the only factor in what kind of home loan terms you can secure—plus it can entail significant risk.

Benefits of Using Home Equity

Your equity can be put to work for you. The benefits of leveraging it include:

Lower interest rates than unsecured loans (credit cards and most personal loans)
Access to funds if you don’t have much in savings
Opportunity to grow wealth through investments, rental property, or business funding
When borrowed for upgrades and improvements, a path to quickly rebuild equity

Cons and Risks of Using Home Equity

Home equity borrowing has its downside. Keep in mind:

You’ll need to pay closing costs, usually 2% – 5% of the total loan amount¹
Poor credit or a high debt load increase the interest rate even with a fully owned home
You risk foreclosure if you can’t repay the loan
Using it to fund regular living expenses or frivolous needs can lead to a cycle of debt

Options to Borrow Against Your Home

What plan would best meet your goals? One point of comparison is interest rates. With all other factors being equal, here are the options ranked based on June 2023 averages:

Cash-out refinancing (fixed-rate APR averages: 30-year 7.17%, 15-year 6.57%)²
Home equity loan (average interest rate 8.33%)³
Home equity line of credit (average interest rate 8.49%)

Cash-Out Refinancing

A cash-out refinance usually occurs when a homeowner with a current mortgage refinances it to a larger amount that includes a cash sum plus mortgage payoff. But you can still utilize the cash-out refi with a mortgage-free home; the loan will be paid solely as cash.

Borrow up to 80% of your home value with most lenders¹
Use a VA loan to borrow up to 100% of your home value
Fixed interest rates with fixed monthly payments
Minimum credit score usually 620, with lower rates starting at about 720

Home Equity Loan

A traditional home equity loan is a lump-sum consumer loan repaid in monthly payments over a set period.

Borrow up to 80% of your equity with most lenders¹
Some credit unions or smaller banks may allow you to borrow 100% of your equity
Fixed interest rates with fixed monthly payments
Minimum credit score ranges from 620 – 700

It is worth noting that while a home equity loan can provide much-needed funds, it might not be the right choice for everyone, and it’s important to consider the home equity loan pros and cons. In some cases, borrowers have received a denied home equity loan application due to their credit scores or other eligibility issues.

Home Equity Line of Credit (HELOC)

When comparing a home equity loan vs HELOC, instead of receiving a lump sum of cash, a HELOC provides a line of credit available for a draw period of usually 10 years, followed by a repayment period of up to 20 years.¹

Similar to a credit card, you can borrow up to your limit, repay, and reborrow, any time during the draw period. At a minimum, you must make:

Interest-only payments on borrowed funds during the draw period, and
Monthly repayments during the repayment period.

HELOCs are similar to home equity loans in the application and qualification process. However, these loans are typically at a variable interest rate, and monthly repayment amounts depend on both the current rate and the amount borrowed.

Sale-Leaseback Program: A Different Solution

Loans aren’t the only way to leverage your equity without leaving your home after a sale. Sale-leaseback programs, also known as a rent-back agreement, combine a property sale with a guaranteed right to remain in your home as a renter as long as you choose under locked-in rental terms and rates.

Although you’ll add rent to your monthly housing costs, you’ll cash out your home’s value in full, plus you’ll no longer be responsible for:

Property tax
Homeowners insurance
Covered maintenance and repairs

Key Takeaways

Consider your situation: I own my house outright and want a loan. Within this, there are three easy choices to take on equity-based debt: cash-out refinance or a home equity loan or line of credit.

A loan secured by your property as collateral reduces your equity from 100% to a lower amount and includes the risk of foreclosure if you’re unable to repay it. Even though you own your home freely, your credit history and debt level can negatively impact the lower interest rate available with a secured loan.

If you want to remain in your home and avoid taking on new debt while converting your total equity to cash, consider a sale-leaseback program.

This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.

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