You can use a home equity loan to convert your equity into funds that you can then use to pay for any necessary improvements, repairs, or other costs. While it’s possible to obtain a home equity loan while carrying a sum on your first mortgage, it’s not a given. But once your principal mortgage is paid off, it’s typically simpler than ever to be approved for a home equity loan.
If you have a paid-off house and are wondering how to obtain a loan for it since you are in need of money, here is all the information you need for obtaining answers to your questions.
How a Paid-Off Home Can Increase your Chances of Securing a Loan
Your loan-to-value ratio (LTV), which measures how much of your home’s current worth is being borrowed against, has a significant impact on whether you qualify for a home equity loan plus how much you can borrow. In general, the lower your LTV, the less dangerous you are to lenders and the simpler it will be for you to get authorized. Since you don’t owe any money on your mortgage as a result of having your house paid off, your LTV is probably 0. Lenders will take note of this.
The majority of lenders provide you access to 80% to 85% of the value of your property, less any outstanding mortgages. Up to 85% of the total value of your home may be borrowed if there isn’t any outstanding debt. That equates to a lump-sum payout of up to $340,000 on a home valued $400,000, for instance ($400,000 x 85%). If your mortgage was, for example, $150,000 and you didn’t have a paid-off home, you could only obtain $190,000 (($400,000 x 85%) – $150,000).
Loans from Home Equity for a Paid-Off Property
A home equity loan is only one choice you have if you own your house outright and require a loan. You might also think about a cash-out refinance or a home equity line of credit (HELOC).
Each of these choices involves the following:
HELOC Usage for a Paid-Off Home
A sort of mortgage known as a HELOC functions similarly to a credit card. It converts your equity into a line of credit that you can use as needed over a protracted period of time. These might be wise choices if you don’t know how much cash you’ll require or if you have ongoing costs to pay.
You normally make interest-only payments on HELOCs until the draw term, which is typically 10 years, expires. You will then start paying the lender your full interest and principal obligations. The drawback of HELOCs is that their typical interest rates are variable, which means that your rate could go up over time. Fixed rates are occasionally provided by lenders, but they are less frequent.
Taking Advantage of a Home Equity Loan for a Paid-Off Home
A HELOC and a home equity loan differ slightly from one another. Home equity loans provide you with a one-time, lump-sum payout at closing as opposed to a credit line that can be used again.
The repayment schedule for a home equity loan is very similar to that of your first mortgage. Every month until the loan is fully repaid, you’ll pay the principal plus interest. Depending on the lender, home equity loan periods often run from five to thirty years.
Home equity loan interest rates are typically set, so your rates or payment won’t change over time. They frequently have a lower rate than other loans and credit cards because they are secured by collateral.
Refinancing a Paid-Off Home with a Cash-Out Mortgage
Another approach to use the equity in your home is through a cash-out refinance. A cash-out refinance is typically used to refinance an existing mortgage with a new one that has a higher balance, and you keep the difference at closing.
You can still perform a cash-out refinance even if you don’t currently have a mortgage; in fact, it can result in a lower interest rate than alternative financing options. The drawback, though, is that cash-out refinancing closing charges typically run high, so be sure you have funds on hand to meet these. The typical closing expenses for a refinance are about $5,000, according to Freddie Mac.
How to Submit an Application for a Home Equity Loan (Even If Your Home Is Paid Off)
Locate a Lender
Searching for lenders is the first step in obtaining a home equity loan, HELOC, or cash-out refinance. In order to ensure you obtain the greatest offer, you should apply with a minimum of a few credit unions, banks, internet lenders, and other possibilities.
Apply and Deliver the Needed Paperwork
Various financial records will be needed to demonstrate your income, debts, and assets to your lender. Typically, this consists of tax returns, 1099s, W-2s, bank statements, and other documents. Additionally, you will be required to consent to a credit check so that they may assess your payment patterns and credit history.
Obtain a Rating
In order to ascertain your home’s current market value, the lender will request an assessment. They will determine your LTV and the amount of equity you can access using this formula.
Complete Your Financing
Then you will go to a closing appointment to pay your closing expenses and sign your loan documents. If you’re getting a cash-out refinance or home equity loan, the lump sum payment will often appear in your banking account in a few days. To access your credit line with a HELOC, you will get a debit card and a checkbook.
If you have any questions or concerns regarding home equity options after you have paid off your home loan, please don’t hesitate to reach out to our friendly and helpful staff at Fairfax Mortgage Investments today for further details today!