Can I get a mortgage on a house I already own free-and-clear?

Valencia Higuera
The Mortgage Reports contributor

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.

Check your mortgage options (Apr 19th, 2021)

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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 refinance

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 (Apr 19th, 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.

What’s the right mortgage based on your goals?

Although you have several options for getting a mortgage when you already own a home, the right mortgage depends on your specific goals.

I need cash to buy another property

Are you thinking about buying more real estate, like a second home, vacation home, or investment property?

In either situation, you’ll likely need cash for a down payment and/or closing costs. 

You can use your own funds. But if you’re short on cash — or don’t want to touch your personal savings — either a cash-out refinance or a home equity line of credit can help you buy another property.

The benefit of using a cash-out refi to buy another home is that you can lock in a low fixed rate. But it requires you to refinance a portion of your home’s current value, so you’ll have a larger loan amount and pay interest for a longer time — likely 30 years.

A home equity line of credit (HELOC) lets you tap only the amount of cash you need. You can also pay the money back and then reuse the credit line. This lets you borrow — and pay interest on — only the sum you really need.

On the flip side, HELOCs can have higher interest rates than cash-out refinancing, and the rate is often variable, which leaves you with less certainty about your future rate and payments.

I want to make home improvements or repairs

Looking to renovate or make home improvements? Tapping your home’s equity with a home equity loan or a HELOC can provide funds needed for improvements. 

A home equity loan is great if you need an exact amount for a single project.

A HELOC is better when completing several projects over the course of many years since you’re able to tap your equity on an ongoing basis.

You can use a cash-out refi for home improvements, too — especially if you’re interested in getting the lowest rate. But again, the drawback is that you’ll have to finance the entire home value and pay interest over 30 years.

See this comparison of the best home improvement loans for more information.

I’m looking to consolidate debt

Home equity can also help you consolidate high-interest debts, like credit card debt or personal loans.

This is typically done using a cash-out refinance. You tap your home equity, use it to pay off existing debts, and then effectively repay them to your mortgage lender at a much lower interest rate.

This can be a very smart way to save money on interest payments. But experts warn that using a cash-out refinance to consolidate debt has risks, too.

Remember, the new loan is secured against your home. So if you run the debts back up and can’t make loan payments, there could be a risk of foreclosure.

Talk to a lender about your mortgage options (Apr 19th, 2021)

I own a home with no mortgage and want to buy another house

Understand that mortgaging your current home isn’t always necessary when buying a second home, vacation home, or investment property.

Chances are, you have enough in your personal savings to purchase a new house without tapping your current home’s equity.

Before getting a mortgage on a house you already own, look into mortgage loans that allow low down payments.

Home buyers should consider:

Conventional loans

If you’re buying a new home to use as your primary residence, conventional loans allow financing with as little as 3% down payment. And you only need a credit score of 620 or higher to qualify.

If you’ll remain in your current home full-time, and plan to use the new property as a vacation home, you’ll need at least 10% down.

And if you’re purchasing a rental or investment property, you’ll typically need 15-25% down for a conventional loan. You’ll also need a slightly better credit score of 640 or higher.

Check your conventional loan eligibility (Apr 19th, 2021)

VA loans

VA loans are typically the best option for eligible veterans and service members. They have low mortgage rates, no mortgage insurance, and don’t require a down payment.

Unfortunately, you can’t buy a vacation home or investment property with a VA loan. You must be buying a home you plan to live in full-time.

The only exception is when buying a multi-unit property (up to 4 units). You can live in one of the units and rent out the others.

You can use a VA loan to buy a second home, but only if you’re moving. 

If the second home becomes your primary residence, you can rent out your former home and use this rental income to pay the mortgage on your new home.

Check your VA loan eligibility (Apr 19th, 2021)

FHA loans

FHA loans only require a minimum of 3.5% down and a credit score of 580 to purchase a home.

You cannot use an FHA loan to purchase a vacation home or an investment property. But you can use one to buy a multi-unit property (up to 4 units), live in one of the units, and rent the others.

You can also use an FHA loan for a home you plan to move into. However, prepare to explain to your lender why you are leaving your current home. In order to use FHA, you need to be moving into a home that is more suitable for your situation. For instance, your current home has two bedrooms and you need four. Or, the new home is substantially closer to work. If you don’t have a good reason, you likely won’t be able to use FHA if you currently own a satisfactory home.

The main benefit of FHA financing is its flexible credit guidelines. The downside is that these loans come with expensive mortgage insurance.

So if you have a good credit score and at least 3% down, we’d recommend looking into a conventional mortgage first.

Check your FHA loan eligibility (Apr 19th, 2021)

Interest rates for a second home

If you’re using cash from your equity to buy another home, make sure you understand how interest rates work on a vacation home, second home, and investment property.

Since this isn’t your primary residence, you can expect a slightly higher mortgage rate. This rate increase protects the lender because these properties have a higher risk of default. 

Mortgage lenders know that in the event of financial hardship, homeowners prioritize paying the mortgage on their primary home before a second home or investment property. 

But although you’ll pay a higher rate when buying a second home, shopping around and comparing loans can help you save. 

So whether you’re purchasing another home, or getting a cash-out refi, home equity loan, or home equity line of credit, make sure you request rate quotes from at least three lenders.

Should you mortgage the house you own?

Owning a home with no mortgage provides a nice equity cushion. The good news, though, is that you don’t have to sell to access your equity. 

Between a cash-out refinance, a home equity loan, or a home equity line of credit, homeowners can pull cash from their equity and use the money for many different purposes.

Make sure you understand the pros and cons of each type of financing, and choose the best one for you based on your specific goals.

Verify your new rate (Apr 19th, 2021)