Can I get a mortgage on a house I already own free-and-clear?
How to get a mortgage on a free-and-clear house
If you own your home outright — with no current mortgage — its value is all equity. You can tap that equity and put it to use by taking out a mortgage on the home you already own. Maybe you want to buy a second property. You could mortgage your first home. Or you can leave it’s value untouched and finance your new home purchase instead. There are many different mortgage options available when you already own your home. So do your research and choose the best one based on your goals.
How to get a mortgage on a house you already own
Getting a mortgage on a house you already own lets you tap (or borrow from) your home equity without selling. The type of mortgage you’ll qualify for depends on your credit score, debt-to-income ratio, and other factors. But assuming your finances are in good shape, you can likely choose from any of the following options:
Cash-out refinancing typically involves applying for a new mortgage to replace an existing mortgage, and borrowing cash from your equity in the process. In your case, you aren’t paying off an existing mortgage, so the most or all of the loan will come to you as cash. You can borrow up to 80% of your home’s value. Refinancing does involve a home appraisal and closing costs, which can range between 2% and 5% of your loan balance. You can pay closing costs out of pocket, or your lender might be willing to cover part of them (in exchange for a higher interest rate) or roll the closing costs into your loan balance. Cash-out refinancing typically requires a credit score of at least 620. But a higher score (720 and up) will earn you a lower mortgage rate and help you save on interest costs. Verify your cash-out refinance eligibility (May 9th, 2021)
Home equity loan
Another option is a home equity loan. As with a cash-out refinance, the amount you can borrow is based on your home’s value. It will also depend on your credit score. Homeowners can typically borrow up to 80% of their home’s equity. However, some small banks and credit unions will allow you to pull out 100% of your equity. Once you’re approved, you’ll receive a lump sum for the intended purpose. Home equity loans have higher rates compared to refinancing, but lower rates compared to a credit card. Since it’s an installment loan, you’ll also have a fixed monthly payment. Many lenders set their minimum credit score for a home equity loan between 620 and 700.
Home equity line of credit (HELOC)
A home equity line of credit is similar to a home equity loan. But rather than receive a lump sum of cash, you have access to a line of credit that you can borrow from on an as-needed basis. Home equity lines often have a draw period of 10 years, meaning you can borrow from the credit line and repay it as often as you want within that time frame. After the draw period ends, there’s typically a repayment term of 20 years when you cannot borrow from the HELOC and must repay any outstanding balance with interest. HELOCs are a type of revolving account, so the amount borrowed determines your monthly payment. We take you step-by-step to get your home loan done right, even if you have a complex financial situation.
Lender 4 You Ltd. is a residential and commercial mortgage broker. Servicing Park Ridge, Des Plaines