As long as you qualify for the loan, you can definitely get a home equity line of credit (HELOC) on a home with no mortgage. In fact, it may be easier to qualify for a HELOC on a property without any existing loans.
A HELOC can be a great way to access the equity in a property that you own free and clear because the closing costs are typically lower than for a cash out refinance. Additionally, because the loan amount is smaller and you are only charged on the outstanding loan balance, as opposed to the maximum amount of the line, your monthly loan payment and total interest expense are also lower.
Another benefit of using a HELOC to take cash out of a home is that you can draw down and repay the line an unlimited number of times during the draw period, highlighting the financial flexibility that it offers. For example, if you want to use the line to pay for property renovations you can then pay off the line and draw it down again in the future and use the proceeds for something else.
The table below shows HELOC rates, fees and terms. We recommend that you contact multiple lenders to find the loan that best meets your needs.
One of the main factors that lenders review to determine the HELOC you qualify for is your combined loan-to-value (CLTV) ratio, which is the total amount of loans on a property, including your mortgage, divided by the fair market value of the property. Lenders usually apply a maximum CLTV ratio of 80% to 90% depending on the type of property and other factors.
The good news is that when apply for a HELOC on a property with no mortgage, the CLTV ratio should not limit your maximum loan amount because you own the property free and clear. Additionally, because your CLTV ratio is likely to be relatively low, multiple lenders should be highly interested in providing you a HELOC.
Because there are no other loans on the property, when you contact HELOC lenders they will likely focus on your debt-to-income ratio, credit score, employment status and financial resources. Even though your property provides significant collateral for the lender, they want to make sure that you can afford your monthly payments, property tax and homeowners insurance and repay the loan.
Please note that lenders assume that the HELOC is fully drawn to determine your ability to qualify for the loan and to calculate the CLTV ratio. So even if you do not intend to draw down the line at closing, lenders use the most conservative approach to evaluate if you can afford the loan and to confirm that you have sufficient equity in your property to support the maximum draw amount (which should not be an issue because the property is debt free).
Review How a HELOC Works
When you review HELOC proposals make sure to ask the lender if they charge a prepayment penalty or a non-utilization fee. Some lenders charge a penalty if you pay off and close your HELOC within a specified number of years and some lenders charge a non-utilization fee if you do not maintain a minimum loan balance. These points may be negotiable and we recommend that you avoid these extra fees if possible.
Finally, the one downside to using a HELOC on a property you own free and clear is that you may not be able to take out as much equity as you want. Some lenders may cap the maximum loan amount you are eligible for, which may be problematic for highly-value properties.
In this case, a cash out refinance may be a better option to access the equity in your home. While this approach does not offer the same financial flexibility as a HELOC, you should be able to maximize the proceeds you receive.
The table below shows refinance rates and fees for leading lenders. We recommend that you shop multiple lenders to find the best cash out refinance terms.
“My lender offered me a Home Equity Line of Credit (HELOC). What is a HELOC?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.