How To Get Equity Out Of A Paid-Off House

Paying off a mortgage is a huge milestone. It usually takes years to accomplish, but you finally own your property free and clear. Plus, you unlock other ways to borrow money.

It’s possible to get equity out of a house that’s been paid off. Your main options include a home equity loan, home equity line of credit (HELOC), cash-out refinance and reverse mortgage.

Can You Take Equity Out of a Paid-Off House?

Yes, you can take equity out of a paid-off house—and you may be able to borrow a large sum because you own 100% of the equity. Lenders typically allow you to borrow around 80% to 90% of the value of your home, minus any balance you have on the first mortgage. However, if you have no mortgage balance, some may let you borrow up to 100% of your home’s value.

Having enough equity is just one of the requirements you’ll need to meet. When you apply for a loan, the lender will also check your credit score, debt-to-income ratio and ability to repay the loan.

How To Get Equity Out of a Paid-Off House

To tap your home equity, there are several options you can choose from, including:

Home Equity Loan

Best if: You have one large expense and you prefer predictable payments.

A home equity loan gives you money in one lump sum upfront. You then make installment payments over time, usually around five to 30 years. Budgeting is predictable here because the interest rate and payments are fixed for the life of the loan.

Home equity loan lenders often let you borrow around 80% to 85% of your home’s value—minus any mortgage balance—and some go as high as 100%. But lenders may also set a maximum loan limit, such as $400,000, regardless of your home’s value. This might reduce the amount you can borrow even with sizable home equity.

Some lenders won’t charge upfront fees and closing costs, but they may charge a slightly higher interest rate to recoup their costs.

HELOC

Best if: You need a regular flow of cash to pay for various expenses over time.

A HELOC grants access to a line of credit that you can borrow from, pay off and reuse during the “draw period,” which may last anywhere from five to 20 years. Following the draw period, you’ll repay any remaining balance over a set timeframe, usually around 10 years or more.

Interest rates on HELOCs are typically variable, though you can lock in a fixed rate on individual draws. The interest rate only applies to the funds you withdraw.

HELOC lenders often let you borrow around 80% to 90% of your home’s value, minus any mortgage balance. Like home equity loans, you may find HELOCs that don’t charge upfront closing costs, but you’ll need to check whether you’re paying a slightly higher interest rate in exchange.

Cash-Out Refinance

Best if: You qualify for better loan terms, lower closing costs or a higher loan limit.

With a typical cash-out refinance, you replace your mortgage with a new, larger one, pay off the old mortgage and keep the surplus money. However, if you own the home outright, there’s no “current mortgage” to pay off. That means you can borrow the entire loan amount, which is typically 80% of your home’s value.

A cash-out refinance loan is often subject to loan limits set by financing agencies like Fannie Mae and the Federal Housing Administration (FHA). The maximum limit goes up to $766,550 for one-unit properties in most counties across the U.S., depending on the type of loan you take out. You may be able to borrow more with a cash-out refinance compared to a home equity loan or HELOC.

Reverse Mortgage

Best if: You’re at least 62 years old and need to borrow money without adding a new monthly mortgage payment to your budget.

A reverse mortgage is an agreement where a lender gives you money that doesn’t have to be repaid right away. The lender may either give you a lump sum of money upfront, a series of regular payments or access to a line of credit. You repay the money when you sell the home or permanently move out.

To qualify for a reverse mortgage, you must be at least 62 years old and either own the home outright or have a significant amount of equity in it. You’ll also need to pay your property taxes and homeowners insurance while living in the home throughout the loan term.

When Should You Tap Equity on a Paid-Off House?

Borrowing against your home equity is a big decision, so consider it carefully before you apply for a loan. Here are some points to consider:

• The amount you want to borrow. Consider how you’ll use the funds, which will help determine the type of loan you’ll take out, how much to borrow and what your monthly payments will be.
• Monthly payment affordability. Once you determine how you’ll borrow the money and estimate your monthly payment, check whether that payment fits into your monthly budget.
• The alternatives. Tapping your home equity comes with drawbacks, so it’s good to consider alternatives like personal loans, 0% APR credit cards or using savings for a large purchase.

Pros of Tapping Equity on a Paid-Off House

Accessing equity on a paid-off home comes with certain advantages, such as:

• Better approval chances. Owning your home outright means you’re no longer making payments on a first mortgage, which lowers your DTI ratio. You also no longer have first liens against your property. These factors reduce risk for the lender, which could make it easier to qualify for a new loan.
• Potentially low interest rate. Home equity loans, HELOCs and cash-out refinances all have lower interest rates compared to unsecured loans because your property acts as collateral.
• Longer repayment terms. Home equity loans, HELOCs and cash-out refinances typically offer repayment terms of up to 30 years. In contrast, personal loans are typically repaid over two to seven years. The longer payback period reduces your monthly payments, although you may pay more interest over the life of the loan.

Cons of Tapping Equity on a Paid-Off House

Before tapping equity on your paid-off house, consider the following drawbacks:

• Puts your home at risk. Your property acts as collateral with a HELOC, home equity loan and cash-out refinance. Falling behind or defaulting on payments could put your home at risk, since the lender can foreclose on your property.
• No longer own the home outright. Once you tap your home equity, you reintroduce monthly payments into your budget. You’re also depleting an asset that likely took you several years to pay off.
• Risk of going underwater. If the value of your home dips dramatically, you may wind up owing more than the home is worth. This could be a problem if you need to sell your home before paying off the loan. And your lender may cap your credit limit if you have a HELOC.