Congratulation on paying off your mortgage! However, you currently don’t have enough cash on hand to handle a sizable home repair job. How are you going to raise the funds? One option is to use the equity in your paid-off property as collateral for a loan. Before you proceed, you should be aware of the following.
- Yes, you can take out a home equity loan on a home with no mortgage.
- Not having a mortgage only increases the amount you can borrow with a home equity loan.
- Borrowing against your home carries risks that you’ll want to consider.
- If you’re uncertain how much money you need to borrow, a home equity line of credit (HELOC) might be a better option.
- If the amount you are borrowing is sufficiently large, a cash-out refinance could cost you less in interest and fees than a home equity loan.
How a Home Equity Loan Works When You Have No Mortgage
You may borrow money through a home equity loan, which lets you use the equity that has grown in your house. You get a one-time lump amount from the lender and start making set monthly payments right away over a certain time frame, like 10 or 20 years. A home equity loan will have a lower interest rate than unsecured debt, like a credit card or a personal loan, since it is secured by your house. The drawback is that if you can’t pay it back, your house might be in jeopardy.
However, if you don’t already have a standard mortgage since you will have less total debt, a home equity loan could be a little less dangerous for you. Additionally, you’ll be less likely to find yourself underwater, which is when your mortgage debt exceeds the value of your property due to dropping housing values. If your property is underwater, selling it may be hard unless you can get the cash from other sources to pay off your debts in full.
Lenders can determine how much equity you have in your house and the size of the loan they would be able to provide you more easily if your mortgage is paid off. Your equity is the amount you might get if you sold the home right now.
Home Equity Loan vs. HELOC When Your Home Is Paid Off
There are other ways to access your equity than a home equity loan. A home equity line of credit is an additional (HELOC).
Instead of receiving a single lump amount at the beginning as is the case with a home equity loan, you get a line of credit from the lender with a HELOC that you may use as required. A HELOC could be a better choice for you if you don’t truly need money right now but still want access to credit in the future at a cheaper interest rate than a typical credit card. HELOCs often have variable interest rates, so when interest rates rise, your payments may dramatically increase.
A home equity loan is definitely a better option for you if you are confident of the precise amount you need to borrow and don’t feel comfortable with the ambiguity of a variable interest rate.
Home Equity Loan vs. Cash-Out Refinance When Your Home Is Paid Off
Refinancing with a cash payout is still another option. A typical cash-out refinancing involves the homeowner taking out a new loan that is larger in amount than their existing one. They may use the additional money after paying off the existing mortgage. Of course, they will still be responsible for paying it back, and in the meanwhile, interest will accrue.
However, once your house is paid off, you won’t have a mortgage to pay and may use the whole loan amount as you see fit.
On a property that has been paid off, choosing between a cash-out refinancing and a home equity loan is not difficult. If you are certain of the quantity of money you need, ask lenders for estimates for both. the yearly percentage rates of the two, and then (APRs).
You can find out which choice will save you the most money over the course of each loan by entering your information into the mortgage calculator below.
What Are the Lending Requirements for a Home Equity Loan?
Many of the lending criteria for home equity loans are the same as those for other loan types: a proven track record of income, a favorable debt-to-income ratio, and acceptable credit. Along with these specifications, your house must have a combined loan-to-value (CLTV) ratio of 85% or less. This indicates that 85% or less of the current worth of your house is left after dividing the total sum of all of your mortgage debts. You have a 0% CLTV if you don’t have a mortgage, thus you unquestionably fulfill the CLTV criterion for a home equity loan.
What Are the Alternatives to a Home Equity Loan?
A completely stocked emergency fund or saving up in advance for anything you’re thinking of getting a home equity loan for is the ideal substitute for one. If your position prevents you from doing that, there are other solutions that won’t jeopardize your property, such as 0% APR credit cards or personal loans.
Can You Lose Your Home if You Don’t Pay Back Your Home Equity Loan?
If you don’t repay your lender and go into default on the loan, you may indeed lose your property to foreclosure.
The Bottom Line
It’s pretty similar to taking out a home equity loan while you have a mortgage to take one out when you don’t. But before you do, weigh your options against a cash-out refinancing or a home equity line of credit, for example. Additionally, you should confirm that you are taking out a home equity loan for valid financial reasons and that you are aware of the dangers associated.
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