Can I Get a Loan Against my Paid-Off House?

Posted by in Loans | Updated on October 18, 2022
At a Glance: You can use your paid-off house as loan collateral. The most common type is a home equity loan. There are also reverse mortgages and HELOCs. Only use your home as collateral for a worthwhile purpose though. Defaulting can result in foreclosure.

A paid-off house is a very valuable asset. If you want to access that value without selling or renting, you may ask yourself, ‘My house is paid off can I get a loan?’ Read on to learn the ins and outs of home equity finance.

How to Get a Home Equity Loan on a Paid-Off House?

If you are asking yourself, ‘My house is paid off can I get a loan?’, the process may not be clear, even if you know the answer is yes. The steps to achieving this are outlined below.

Choose a Lender

The first step is to choose a lender. Pay attention to:

  •  the annual percentage rate (APR)
  •  the penalties and extra fees
  • extra perks and benefits of the loan
  • repayment term.

Apply and Submit Required Documents

The next step is submitting the required documents, such as:

  • Tax returns
  • Bank statements
  • Proof of income.

Get an Appraisal

In this step, the lender will hire a specialist to calculate the market value of your home. Market values change over time, so this number could be very different than what you paid to build or buy your house.

The market value of your home will determine the maximum size of the loan available to you.

Close on the Loan

The final step is closing. This is when you sign the legal agreements with the lender. You might also be charged closing costs. A few days after closing, you will have access to the funds.

Pros of Getting a Home Equity Loan on a Paid-Off House?

For the situation in which you ask yourself, ‘My house is paid off can I get a loan?’, there are some benefits to using a paid-off house as loan collateral.

  • Cost: Home equity loans often have lower interest than other types of loans, because of the collateral.
  • Equity: You have 100% equity in a paid-off house, so you benefit from the full value of the house when the lender calculates the loan value.
  • Rate: Most home equity loan products offer a fixed interest rate which gives you a predictable payment schedule for the life of the loan.
  • Flexibility: You can use the funds from a home equity loan on whatever you want.
  • Tax: The repayments on a home equity loan are tax-deductible under certain circumstances. You could use them to reduce your taxable income on your income tax return. 

Cons of Getting a Home Equity Loan on a Paid-Off House?

For the situation in which you ask yourself, ‘My house is paid off can I get a loan?’, there are some downsides to using a paid-off house as loan collateral.

  • Risk: This is the single biggest disadvantage. If you default on the loan (fail to pay it back), even through no fault of your own, you will lose your home. The lender has the right to foreclose on your home if you default on the loan for any reason.
  • Cost: Although cheaper than unsecured loan products, home equity loans tend to have higher interest rates than other home equity-based finance products such as home equity lines of credit (HELOCs).
  • Closing: Many leaders charge closing costs, which could be as much as 5% of the loan value.
  • Repayment: Unlike a line of credit, you must stick to the repayment schedule of a home equity loan. 
  • Market: If there is a decrease in house prices in your area, you may end up paying more in repayments than your home is worth.

Alternative Options for Borrowing Against Your Home

For the situation in which you ask yourself, ‘My house is paid off can I get a loan?’, there are several alternatives you can explore besides a home equity loan. A few of these are outlined below.

Reverse Mortgage

If your house is paid off and you are older than 62, you can get a home equity conversion mortgage (HECM), which is a type of reverse mortgage. Instead of you making payments against a lump sum given to you by the lender, the reverse happens. The lender makes regular payments to you, and the outstanding balance on your loan grows over time.

The loan comes due when the homeowner dies, moves out of, or sells the house.

Cash-Out Refinance

A cash-out refinance is similar to refinancing your mortgaged home to get a better rate with a different lender. The interest rates for cash-out refinance loans are often lower than a home equity loan, but there could potentially be much higher closing costs.

Home Equity Line of Credit

A line of credit is similar to a loan but works like a credit card. A home equity line of credit (HELOC) is a credit facility that uses your house as collateral. This allows you to get credit for things as you need them. You pay interest on the amount you have used from the home equity line of credit and pay it off on a rolling basis, like paying off a credit card.

Using your home as collateral is not a decision to take lightly. If you fail to make repayments, your HELOC lender could foreclose on your home to recover the money you borrowed. Keep this in mind when thinking ‘My house is paid off can I get a loan?’

Considerations When Borrowing Against a Paid-Off House

You could lose your home if you default on the loan. It doesn’t matter if something out of your control prevents you from making payments. The lender will still have the right to foreclose on your home if you do not make payments.

A few other things to keep in mind are:

  • Purpose: A home equity loan is a serious decision. Only use a home equity loan for important things (e.g. home repairs or improvement, income-generating business). Never use a home equity loan for frivolous purchases.
  • Amount: Only borrow as much as you need. The larger the loan, the more you pay over time in interest. 
  • Affordability: Make sure you can afford a new monthly payment. Will you have to sacrifice other important goals like saving?
  • Rate: Before you accept an interest rate, make sure it makes financial sense for you to borrow at the offered rate.
  • Explore: Using your home as loan collateral is a big step. Make sure you have explored all other alternatives before you take this step. This includes waiting while you build up your savings. For certain kinds of home improvements or repairs, you could qualify for federal or state assistance programs.

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Final Thoughts 

If your house is paid-off you can use it as collateral for various types of credit. The most common is a home equity loan. There are also reverse mortgages and HELOCs. Whichever alternative you choose, make sure it is for a worthwhile purpose because defaulting on the loan could result in foreclosure.


Need a Loan? Get One in 3 Simple Steps

If you are considering applying for a personal loan, just follow these 3 simple steps.

Apply

Apply online for the loan amount you need. Submit the required documentation and provide your best possible application. Stronger applications get better loan offers.

Accept

If your application meets the eligibility criteria, the lender will contact you with regard to your application. Provide any additional information if required. Soon you’ll have your loan offer. Some lenders send a promissory note with your loan offer. Sign and return that note if you wish to accept the loan offer.

Repay

The loan then gets disbursed into your U.S. bank account within a reasonable number of days (some lenders will be as quick as 2-3 business days). Now you need to set up your repayment method. You can choose an autopay method online to help you pay on time every month.

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