How Do I Get a Loan on a House That Is Paid For?

To get a loan on a paid-off house, you borrow against your equity through one of three products: a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. Most lenders will let you borrow up to 80% of the home’s appraised value, and because there is no existing mortgage to pay off, the full amount (minus closing costs) comes to you. A $400,000 home can unlock as much as $320,000 in cash. The application, underwriting, and closing process looks a lot like getting a regular mortgage.

Which Loan Product Fits Your Situation

The three options solve different problems. Picking the right one starts with how you plan to use the money and how much predictability you want in the payment.

Home Equity Loan

A home equity loan hands you a single lump sum at a fixed interest rate, repaid in equal monthly installments over a term of 5 to 30 years. Same payment every month, no rate surprises. Because your home carries no existing liens, this loan takes first-lien position, which is one reason home equity loans on paid-off homes tend to price slightly better than the same product on a home that still has a mortgage.

Home Equity Line of Credit

A HELOC works like a credit card secured by your house. The lender sets a credit limit, and you draw against it during a “draw period” that typically lasts ten years, paying interest only on what you actually use. After the draw period ends, you enter a repayment phase of 10 to 20 years during which you can no longer borrow and must pay the balance down. Most HELOCs carry a variable interest rate, so the payment can rise or fall. Federal rules require the lender to disclose both the annual and lifetime caps on how much the rate can climb, so ask for both numbers before you sign.¹

Cash-Out Refinance

A cash-out refinance on a paid-off home is technically a brand-new first mortgage, with the loan proceeds (less closing costs) delivered at the table. Fannie Mae treats this as a standard cash-out refinance as long as you have been on title for at least six months.² Rate pricing can differ from a home equity loan or HELOC, and the closing costs run higher because you are originating a full mortgage. In exchange, you get a single, clean loan structure and often a lower rate than a second-lien product.

What Lenders Look For

Every lender underwrites against the same three numbers.

Credit score. Most lenders want a FICO score of around 680. Some will approve down to 620, but expect a higher rate and a smaller loan. A score above 740 gets you into the best pricing.
Debt-to-income ratio. This is the share of your gross monthly income that goes to debt payments, including the new loan. The standard ceiling is 43%, though some lenders stretch to 50% for strong borrowers. The 43% figure comes from the ability-to-repay rule under the Dodd-Frank Act, which requires lenders to verify you can actually afford the loan before approving it.³
Loan-to-value ratio. With no existing mortgage, the LTV is simply the loan amount divided by the appraised value. Most lenders cap this at 80%. Some programs go to 85% or 90%, but the higher tiers usually mean a steeper rate or a mortgage insurance requirement.

Documents to Gather Before You Apply

Applications run on the Uniform Residential Loan Application (Fannie Mae Form 1003), whether you file online or in person.⁴ Having your paperwork ready shortens the process considerably.

Income. Your most recent pay stub (dated within 30 days of application) and W-2 forms from the past two years. Add 1099s if you take contract or freelance income.⁵
Self-employment income. Two full years of federal tax returns, including Schedule C. Lenders average your net income across those two years, so a soft recent year drags down what you qualify for.⁶
Assets. Two months of statements for checking, savings, and retirement accounts, to show you have reserves.⁶
Property. Your homeowner’s insurance declarations page and a copy of the deed. If you cannot find the deed, your county recorder’s office has it.

Check that the legal description on your deed matches the county’s records. Any mismatch can stall underwriting or create title problems that push back closing.

From Application to Closing

Once your file is in, the lender orders two things. A professional appraisal establishes the home’s current market value, which sets the ceiling on how much you can borrow. A title search pulls public records looking for anything that could complicate the lender’s claim: unpaid liens, court judgments, delinquent property taxes, or ownership disputes.

If the appraisal comes in low, your maximum loan amount drops with it. You can challenge a low appraisal with comparable sales, but the lender is not required to move. Owning free and clear helps here: with no existing loan balance eating into equity, even a conservative appraisal usually leaves room to borrow what you need.

At closing you sign a promissory note (your legal promise to repay) and a mortgage or deed of trust (which gives the lender a security interest in the home). Both get recorded in the county’s public records.

For loans secured by a primary residence, federal law gives you three business days after signing to cancel. During those three days, the lender cannot release any funds.⁷ If you never got the required disclosure forms at closing, or the forms contained errors, that cancellation window extends up to three years.⁸

What Closing Will Cost

Closing costs on home equity loans and HELOCs typically run 2% to 6% of the loan amount. On a $200,000 loan, that works out to $4,000 to $12,000. The usual line items:

Origination fee, 0.5% to 1% of the loan amount.
Appraisal fee, roughly $300 to $600 for a standard single-family home. Complex or high-value properties cost more.
Title search, $75 to $250. Lender’s title insurance adds another 0.5% to 1% of the loan amount.
Recording fee charged by the county, generally $50 to $150.
Credit report, document preparation, notary, and flood certification fees, adding up to a few hundred dollars combined.

Some lenders advertise “no closing cost” HELOCs. That usually means the costs are baked into a slightly higher rate, or the lender will claw them back if you close the line within the first few years. Read the early termination language before you sign.

When the Interest Is Tax-Deductible

Interest on a home equity loan, HELOC, or cash-out refinance is deductible only if you use the proceeds to buy, build, or substantially improve the home securing the loan.⁹ Borrow to renovate the kitchen and add a second story: deductible. Borrow the same amount to pay off credit cards or fund a business: not deductible.

The total mortgage debt eligible for the interest deduction is capped at $750,000, or $375,000 if you file married filing separately.¹⁰ You only benefit from the deduction if you itemize, and for many homeowners the standard deduction comes out ahead anyway.

The Risks of Putting a Paid-Off House Back Into Debt

The biggest risk is the one most people glide past: you can lose the house. Any of these loans turns your paid-off property into collateral. Miss enough payments and the lender can foreclose on a home you previously owned outright. Borrowers using a home equity product to consolidate credit card or medical debt should think hard about whether they are solving a problem or converting unsecured debt (which cannot take the house) into secured debt (which can).

Variable-rate HELOCs add a second layer of risk. If rates climb, your payment climbs with them. Run the math at the maximum rate disclosed in your paperwork before signing.¹ If that ceiling payment would break the budget, a fixed-rate home equity loan is the safer product.

Lenders can also freeze or cut a HELOC’s credit limit if the home’s value falls or your finances change materially. That protection exists for the lender, not for you, and it can close off access to money right when you need it most.⁸

If You Are 62 or Older, a Reverse Mortgage Is a Separate Option

Homeowners at least 62 years old with a paid-off house have access to a fundamentally different product: a Home Equity Conversion Mortgage (HECM). Instead of you making payments to the lender, the lender pays you, as a lump sum, monthly income, a line of credit, or some combination. Nothing has to be repaid until you sell the home, move out, or die. Before applying, federal law requires you to complete a session with a HUD-certified housing counselor who is independent of the lender.¹¹ Upfront costs, including an FHA mortgage insurance premium, are higher than for conventional home equity products, and the loan balance grows over time as interest accrues, steadily eroding the equity you have left. For some retirees on fixed incomes the trade-off works; for homeowners who want to preserve equity for heirs, a conventional home equity loan or HELOC is usually the better tool.

1
Consumer Financial Protection Bureau. 12 CFR 1026.40 – Requirements for Home Equity Plans
2
Fannie Mae. Cash-Out Refinance Transactions
3
Legal Information Institute (LII) at Cornell Law School. Dodd-Frank Title XIV – Mortgage Reform and Anti-Predatory Lending Act
4
Fannie Mae. Uniform Residential Loan Application (Form 1003)
5
Fannie Mae. Standards for Employment and Income Documentation
6
Fannie Mae. Documents You Need to Apply for a Mortgage
7
Consumer Financial Protection Bureau. 12 CFR 1026.23 – Right of Rescission
8
Federal Trade Commission. Home Equity Loans and Home Equity Lines of Credit
9
Internal Revenue Service. Publication 936 – Home Mortgage Interest Deduction
10
Office of the Law Revision Counsel. 26 USC 163 – Interest
11
HUD. Handbook 7610.1 – HECM Counseling