How to get a mortgage on a vacant and clear house
If you fully own your home without a current mortgage, its value is all equity.
You can develop and capitalize on this equity by taking out a mortgage on the home you already own.
You might want to buy a second property. You could mortgage your first home. Or you can leave the value untouched and finance your new home purchase instead.
There are many different mortgage options if you already own your home. So do your research and choose the best one based on your goals.
Review Your Mortgage Options (December 28, 2020)
In this article (jump to …)
How to get a mortgage on a home you already own
If you get a mortgage on a home you already own, you can get (or borrow) your home equity without selling it.
The type of mortgage you qualify for depends on your creditworthiness, debt to income ratio, and other factors.
Assuming your finances are in good shape, you can likely choose from one of the following options:
Refinancing disbursements typically involves applying for a new mortgage to replace an existing mortgage and drawing cash out of your equity.
In your case, you are not paying off an existing mortgage, so most or all of the loan goes to you as cash.
You can borrow up to 80% of the value of your home.
The refinancing includes a home valuation and closing costs, which can range from 2% to 5% of your loan balance.
You can pay the closing costs out of pocket, or your lender may be willing to cover some of it (in exchange for a higher interest rate) or add the closing costs to your loan balance.
Refinancing withdrawals usually requires a credit score of at least 620. However, a higher score (720 and higher) will get you a lower mortgage rate and help you save on interest costs.
Check your Withdrawal Refinancing Eligibility (December 28, 2020).
Another option is a home equity loan. As with a withdrawal refinance, the amount you can borrow is based on the value of your home. This also depends on your creditworthiness.
Homeowners can typically borrow up to 80% of their home's equity. However, some small banks and credit unions allow you to withdraw 100% of your equity.
Once approved, you will receive a flat fee for its intended purpose.
Home equity loans have higher interest rates compared to refinancing, but lower interest rates compared to a credit card. Since this is an installment loan, you also have a fixed monthly payment.
Many lenders set their minimum credit rating for a home loan between 620 and 700.
Home Equity Credit Line (HELOC)
A home equity line of credit is similar to a home equity loan. Instead of receiving a lump sum in cash, you have access to a line of credit that you can borrow if needed.
Home lines often have a 10 year draw period, which means you can take out loans within that period and repay them as often as you want.
After the withdrawal period has expired, there is usually a repayment period of 20 years if you cannot take out a loan with HELOC and have to repay outstanding amounts with interest.
HELOCs are a type of revolving account, so the amount borrowed will determine your monthly payment.
What is the Right Mortgage Based on Your Goals?
Although you have several options for getting a mortgage if you already own a home, the right mortgage will depend on your specific goals.
I need cash to buy another property
Are you thinking about buying more properties like a second home, vacation home, or investment property?
In either case, you will likely need cash for a down payment and / or closing costs.
You can use your own resources. However, if you are short on cash or don't want to touch your personal savings, either a cashout refinance or a home equity line of credit can help you purchase another property.
The benefit of using a cash out refi to buy another home is that you can set a low, fixed price. However, you need to refinance some of the current value of your home so you can have a larger loan amount and pay interest for a longer period – likely 30 years.
With a home equity line of credit (HELOC), you can only get the amount of cash you need. You can also pay back the money and then reuse the line of credit. This way, you can only borrow and pay interest on the amount that you really need.
HELOCs, on the other hand, can have higher interest rates than refinancing withdrawals, and the interest rate is often variable, leaving you with less certainty about your future interest rate and payments.
I want to do DIY or repairs
Do you want to renovate or do home improvement? Taking advantage of your home equity with a home loan or HELOC can provide you with the funds needed to make improvements.
A home equity loan is great when you need an exact amount for a single project.
A HELOC is better if you complete several projects over many years because you can use your equity continuously.
You can also use a withdrawal refi for home improvement – especially if you are interested in the lowest rate. The disadvantage, however, is that you have to finance the entire house value and pay interest over 30 years.
For more information, see this comparison of the best home loans.
I want to consolidate the debt
Home equity can also help you consolidate high-yield debt such as credit card debt or personal loans.
This is usually done through disbursement refinancing. You tap on your home equity, use it to pay off existing debts, and then effectively pay them back to your mortgage lender at a much lower interest rate.
This can be a very clever way to save money on interest payments. However, experts caution that using disbursement refinancing to consolidate debt also comes with risks.
Remember, the new loan is secured against your home. So if you can secure the debt and fail to make loan payments, there is a risk of foreclosure.
Talk to a Lender About Your Mortgage Options (Dec 28, 2020)
I own a home without a mortgage and want to buy another home
Understand that when buying a second home, vacation home, or investment property, a mortgage on your current home is not always required.
You likely have enough personal savings to buy a new home without using the equity of your current home.
Before getting a mortgage on a home that you already own, you should look into mortgage loans that allow for low down payments.
Home buyers should consider the following:
If you are buying a new home for primary residence, traditional loans allow you to finance it with as little as 3% down payment. And you only need a credit score of 620 or higher to qualify.
If you want to stay in your current home all day and use the new property as a holiday home, you need to save at least 10%.
And when you buy a rental or investment property, you typically need 15 to 25% less on a traditional loan. You also need a slightly better credit score of 640 or higher.
Check Your Traditional Loan Eligibility (December 28, 2020)
VA loans are usually the best option for eligible veterans and service members. You have low mortgage rates, no mortgage insurance, and no down payment required.
Unfortunately, you can't buy a vacation home or investment property with a VA loan. You need to buy a house that you want to live in all time.
The only exception is when buying a property with multiple units (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 are moving.
If the second home becomes your primary residence, you can rent out your ex home and use that rental income to pay the mortgage on your new home.
Check Your VA Loan Eligibility (December 28, 2020)
FHA loans only require a minimum of 3.5% decline and a credit rating of 580 to buy a home.
You can't use an FHA loan to buy a vacation home or investment property. However, 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 on a house you want to move into. However, be prepared to explain to your lender why you are leaving your current home. To take advantage of FHA, you need to move into a house that is more suitable for your situation. For example, your current home has two bedrooms and you will need four. Or the new home is much closer to work. Unless you have a good reason, you likely can't use FHA if you currently have a satisfactory home.
The main benefit of FHA funding is the flexible credit guidelines. The disadvantage is that these loans come with expensive mortgage insurance.
So if you have a good credit score and at least 3% less, we recommend checking out a traditional mortgage first.
Check Your FHA Loan Eligibility (December 28, 2020)
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 is not your main residence, you can expect a slightly higher mortgage rate. This rate hike protects the lender as these properties have a higher risk of default.
Mortgage lenders know that in the event of financial distress, homeowners will prioritize paying the mortgage on their primary home over a secondary home or investment property.
Although you pay a higher price when buying a second home, you can save money shopping and comparing loans.
Whether you are buying another home or getting a payout reference, home loan, or line of credit, make sure you get interest rate quotes from at least three lenders.
Should You Mortgage the House You Own?
Owning a home without a mortgage provides a good cushion of equity. The good news, however, is that you don't have to sell to access your equity.
Between a payoff refinance, a home equity loan, or a home equity line of credit, homeowners can pull cash out of 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.
Check your new plan (December 28, 2020)