It’s exciting to finally have no more mortgage payments. But now that you have all that equity in your home, is it possible to get another mortgage to use for other purchases?
You bet you can. Lenders are happy to use the equity you have built up in your home to give you a loan for other needs.
Any loan that isn’t considered a purchase is called a refinance — despite that fact that there isn’t a loan to pay off.Lana Jern, Owner of Uptown Mortgage
But taking out a mortgage on your paid-off house is a big decision, and you really need to think about the ramifications.
“Anytime you are taking money against your property, you are taking a debt that you didn’t have before,” Jern says. “How you will repay that loan is something to consider.”
She recommends that if you need money, you consider another way to find that money. For example, if you need to pay for your daughter’s college tuition and she needs a car, too, there might be several ways to find the funds instead of getting a new mortgage. Maybe your daughter can apply for a student loan through her college or the government, and you can acquire a low-interest car loan for the car she needs.
Refinance loan options for when your house is paid off
- Conventional cash-out refinance
- FHA cash-out refinance
- Home equity line of credit (HELOC)
- Reverse mortgages
If you need house repairs, Jern says, a home equity loan may work out better in the long run.
“If your home is paid off, you can apply for a home equity loan without much hassle,” she says. “However, a HELOC should be put in place before any emergency happens. It lasts 10 years, and you never ever have to take money out of it. But if you need it, it is there.”
Keep in mind though, if you haven’t set up a HELOC and your husband breaks his leg and can’t work, the lender won’t then give you the equity line of credit.
It doesn’t cost anything to set up a HELOC. This is a very inexpensive way to set up some security for the future. If you do a cash-out refinance, then you’ll have to pay closing costs. A HELOC is the cheapest money you’ll ever get.Lana Jern, Owner of Uptown Mortgage
With a cash-out refinance, you can take out 80 percent of the home’s value in cash. With an FHA cash-out refinance, the limit is 85 percent plus you have to pay a mortgage insurance premium and an upfront premium.
For some people, taking out a cash-out refinance for an investment can be quite profitable.
“Let’s say you take out $100,000 cash from a refinance and invest it into creating more assets. If you put back more than what it cost you, then great,” she says.
Reverse mortgages can help older homeowners with things like medical expenses. The government doesn’t let you take more than 50 percent out in a refinance than the value of the property. The owners of the house can live in their home the rest of their lives with this sort of loan.
“Reverse mortgages can be an affordable option for older people that allows them to have the lifestyle they want like the ability to travel or take care of their house,” she says.
A final note on cash-out refinances
When you get a new mortgage you’re taking on more risk. You’re adding another monthly payment to your budget. And, you’re going through the underwriting process with all the verifications and paperwork required that you did when you bought your home.
The government has put in some laws to protect consumers in situations like cash-out refinancing and HELOCs. Under the Truth in Lending Act, you have the right to rescind your HELOC or refinance loan within three days of closing.
“The government wants people to have time to go home and determine if they can really afford it,” Jern says.
Bottom Line: Make sure that a cash-out refinance is the best financial choice for your situation — there may be other financing options available to accomplish your goals.