Refinancing a Paid-Off Home: Here’s How to Do It

In 2019, about 37% of U.S. households owned their homes “free and clear,” meaning they no longer have a home mortgage to pay, according to a Zillow data analysis. This number ticked upward after the Great Recession, and over the past ten years, the share of homeowners paying off their mortgages has risen 5.5 percentage points.

If you are one of the lucky ones who don’t have a current mortgage and want to put that equity to use but don’t want to sell, you can still refinance. Here’s how.

Can You Take Equity Out of a Paid-Off House?

Yes, if your existing mortgage has been paid off, you still have several borrowing options. These include:

  • Cash-out refinancing
  • Home equity loan
  • Home equity line of credit (HELOC)
  • Reverse mortgage
  • Shared equity investment

We will examine each of these in a bit.

Reasons to Tap the Equity on a Paid-Off House

You probably spent a long time paying off your first mortgage. But there are a few good reasons to borrow from your home’s equity:

  • Large home improvement projects
  • Renovations or remodeling
  • Invest in a business
  • Buy a second home
  • Debt consolidation

There are also some poor reasons:

  • Pay for a vacation
  • Buy a car (or some other depreciating asset)
  • Pay for a wedding

Using home equity for long-term projects that create more value than the loan’s cost would be best. For example, even though debt consolidation doesn’t add to your home’s value, it can be worth it to refinance multiple debts into one monthly payment at a lower interest rate.

Because you’re putting your home at risk of foreclosure, be sure not to borrow more than you can afford to lose. Also, be aware that most high-interest debts are unsecured loans such as credit card bills, personal lines of credit, student loans, and medical debt. Once you have paid off the unsecured loans with a secured loan (the equity loan from your house) and cannot pay off the equity loan, you can lose your home. 

Getting Equity Out of a Paid-Off House

Shop around all lenders, brick and mortar, mortgage brokers, credit unions, and online lenders. Do your research on the type of loan that will be most beneficial for you and, more importantly, the reason for the loan.

Cash-Out Refinance 

This works like a traditional mortgage refinance. You take out a new mortgage loan and get the equity in a lump sum at closing. However, you’ll have to pay closing costs that are comparable to the total you paid with your original mortgage, which can cost 2%-5% of the amount you borrow, plus any escrow payments, homeowner insurance premiums, and 20% of your equity will be considered a “down payment.” And the current high interest rates can make the costs add up over the life of the loan.

A note about FHA loans and VA loans: Loans backed by the Veterans Administration and Federal Housing Administration have different rules. The VA and FHA do not back home equity loans. Instead, if you require a VA- or FHA-backed loan, cash-out refinancing is your only option. Otherwise, you can apply for a conventional home equity loan or home equity line of credit. 

Got a paid-off home but thinking about a cash-out refinance? Check out this video for a closer look at some of your options.

Home Equity Loan 

A home equity loan (or second mortgage) is secured by your property and allows you to borrow a large amount of equity because you have no other debt attached to your property. You’ll also have to pay at least some closing costs.

Home equity loans typically come with fixed rates, usually lower than interest rates on personal loans, which can be as high as 30%, depending on your credit score. Plus, depending on how you spend the loan proceeds, the mortgage interest may be tax deductible if you’re using the loan to pay for home renovations that will boost the value of your home.

Home Equity Line of Credit (HELOC)

Many homeowners prefer HELOCs because they have the most flexibility. A HELOC works more like a credit card; you can use it whenever you need it rather than borrow a lump sum.

Homeowners are only responsible for repaying the amount they use, while cash-out refi’s and home equity loans are a fixed obligation. HELOCs have a draw period — usually 10 years — and a credit limit. They also don’t have closing costs.

HELOCs may not be as easily attainable, often have smaller loan limits, and usually have a higher interest rate than home equity loans. The rate may be fixed or adjustable. Repayment can be more straightforward since you’re only making payments using the line of credit.

Reverse Mortgage

If you’re 62 or older, a reverse mortgage might be worth considering. A reverse mortgage lets you get regular payments from a mortgage lender in exchange for your home’s equity.

You’ll still need to keep up with all homeowner’s insurance, property tax, and HOA dues payments to avoid foreclosure, and there’s a limit to how much money you can get. Plus, you’re still on the hook for maintenance.

And there will be implications for the borrower’s estate if a borrower passes away. The house may need to be sold if the estate cannot repay the reverse mortgage.

Shared Equity Investment 

With a shared appreciation or shared equity investment, you are selling a portion of your future home equity in exchange for one lump sum payment. The shared agreement allows you to cash out some of the equity in your home in exchange for giving an investment company a minor ownership stake in the property. It is an arrangement under which a lender and a borrower share property ownership. The borrower must occupy the property, and the investor cannot live in the home or lease it out. When the property sells, the equity allocation goes to each party according to their financial contribution. Each party also shares losses on the sold property, so both participate in the increase or decrease in the property’s value.

After the typical 10-year loan term, you’d have to return the $100,000 investment plus 25% of the home’s appreciation. You would also be required to return the investment plus the share of appreciation if you decide to sell the house.

Pros and Cons of Borrowing Against a Paid-off House

There are various risks and rewards involved, as with anything in life.


  • Easy to qualify for home equity financing
  • Loan amounts are flexible
  • You can use the equity for any reason
  • It could save you from capital gains taxes incurred by selling your home
  • Save on potential tax deductions as an itemized deduction on your tax bill
  • If the funds are used for home improvement, they can increase or preserve your home’s value
  • You can save a significant amount of interest by refinancing high-interest debt
  • You can use the money to make investments that will outperform the interest you are paying if you had to borrow the money
  • You can access cash without accruing expensive debt
  • Can be a good borrowing option for homebuyers looking to invest in a second home


  • It’s a new loan
  • Your credit score may decrease because of the change in your debt-to-income ratio
  • Upfront closing costs like lender fees and an appraisal
  • Depending on what you choose, you’ll end up with a monthly mortgage payment again
  • Your home is at risk if you can’t repay the loan because it is used as collateral
  • Mortgage rates are at historic highs right now
  • You may have to repay the loan balance in a large lump-sum payment at the end of the term
  • A lengthy process of 35-45 days

Should You Mortgage a House You Own Free and Clear?

Whether or not you should commit to a new cash-out refinance, home equity loan, HELOC, reverse mortgage, or shared equity investment depends on your financial situation, ability to repay the debt, money goals, and why you need the money. Deciding whether or not to take a mortgage out on a property, you won free and clear should always be a decision based on fiscal responsibility.

READ MORE: Can you refinance a home equity loan?

The Bottom Line

Taking on debt is always a risk. Take into account the risk and reward and the reasons to take the risk in the first place.

Beware of high upfront closing costs, and be careful not to take on more debt than you can repay. Most debt is, in fact, bad debt, and the only exception is debt that helps you build wealth. If possible, don’t use your house as an ATM.


How Does Loan Underwriting Work?

During the underwriting process, an underwriter will review your mortgage application and decide whether you are likely to be able to repay the loan. The underwriter will determine if you qualify for the mortgage. Then, the underwriter will approve, hold or decline your mortgage application.
The underwriter performs specific tasks such as: 
–Manage all aspects of home mortgage origination, processing, and closing for purchases and refinancing, including prime and sub-prime loans.
–Perform income calculation to verify the debt-to-income ratio.
–Prepare and respond to compliance-related inquiries
–Ensure that all federal guidelines are met
–Reconcile loans for the accuracy of the loan file
–Perform a risk analysis and report deficiencies
–Analyze credit, income, and appraisal documentation guidelines for conforming residential mortgages.
–Assign to conduct independent reviews of loan documents

Should I Use a Cash-Out Refinance to Pay Off My Student Loans?

This will depend on your financial situation. Apply for student loan debt relief approved by President Joe Biden before thinking about a cash-out refi. The Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their income is less than $125,000 ($250,000 for married couples). You have until December 31, 2023, to complete an online form. 
Also, you may be shut out from any future student loan relief opportunities, such as the payment freeze that’s in effect until 2023. Also, you’re using your home to secure the student loans, so if for some reason you can’t make your loan payments, you could end up putting your home at risk.

How Can I Learn my Property’s Market Value?

There are two ways to know your property’s market value. One is to order an appraisal from an official state-licensed property appraiser. The second is to contact a real estate professional for a broker price opinion or BPO. The latter is free but doesn’t hold as much weight as an appraisal report completed by an official state-licensed appraiser.

What are the Debt-to-Income (DTI) Requirements for a Home Equity Loan?

Lenders examine your debt-to-income (DTI) ratio to measure your ability to repay your loan. To calculate this, lenders weigh your regular monthly loan and credit card payments to your gross monthly income. Most lenders require a DTI under 43%.

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