You finally own your home free and clear. And now, you want to put that ownership stake to use. Is this even possible?
Fortunately, the answer is yes. You can take equity out of your home even after your mortgage is paid off. One of the easier ways to do so is to sell your home, but there are also financial products that allow you to extract equity from your paid-off home quickly without having to pick up and move.
Each has its pluses and minuses. So let’s look at the options.
Can you take equity out of a paid-off house?
“It is definitely possible to take equity out of your home after you’ve paid off a previous mortgage,” says Jeffrey Brown, branch manager with Axia Home Loans in Bellevue, Wash. “Assuming you qualify, you can access that equity at any time.”
Actually, those means of access are pretty much the same for a paid-off house as for one that still has a mortgage on it. You can take equity out of your home using one of these tools:
- home equity loan
- home equity line of credit (HELOC)
- reverse mortgage
- cash-out refinance
- shared equity investment
When should you tap equity on a paid-off house?
Why would anyone pursue fresh financing after finally paying off a mortgage? Well, why not? Your home is an asset, and you can make it work for you. And when you own it free and clear, its tappable potential is at its greatest (see Pros, below).
Viable reasons abound for borrowing against your ownership stake, from funding a major home improvement project to investing in a business to purchasing more property. Or, frankly, for whatever you need. However, since your home will serve as the collateral for the debt, you should be judicious in how you tap it. Two good rules to follow: Use your equity in ways that improve your finances or work as an investment and don’t take out more than you can afford to lose.
How to get equity out of a paid-off house
Cash-out refinance on a paid-off home
Let’s say you were still paying off your mortgage, had adequate equity and needed cash. You’d likely do a cash-out refinance, which typically has a relatively lower interest rate compared to other types of loans.
You can do the same now, even though you’ve paid off your mortgage. You’ll simply take out a new mortgage and pocket the equity in the form of cash at closing. As with any refinance, however, you’ll be on the hook for closing costs, which can run 2 percent to 5 percent of the amount you’re borrowing and any escrow payments.
“A cash-out refinance generally results in the lowest interest rate and offers the highest loan amounts you can borrow,” says Matt Hackett, operations manager for Equity Now, a mortgage lender headquartered in Mamaroneck, New York. “It can be a fixed- or adjustable-rate loan, and it is fairly straightforward to apply and qualify for.”
Home equity loan on a paid-off home
Alternatively, you could apply for a house-paid-off home equity loan.
Like a cash-out refinance, a home equity loan is secured by your property (the collateral for the loan) and enables you to extract a large amount of equity because you have no other debt attached to the residence. You’ll also likely need to pay closing costs, and as with any mortgage, you risk losing your home if you can’t pay it back.
The upsides: Home equity loans typically come with fixed interest rates, which are usually much lower than personal loan rates. Plus, if you use the money on home improvements, you can deduct the interest on your taxes.
HELOC on a paid-off home
Many homeowners like the flexibility of a home equity line of credit (HELOC), which works more like a credit card you can use when you need it.
“HELOCs come with adjustable interest rates, often based on the prime rate,” says Hackett. “They offer the opportunity to draw funds and pay back funds during the initial draw period, which is more flexible than a standard first mortgage.”
What’s more, you’re only responsible for repaying the amount you use versus the fixed obligation of a cash-out refinance or home equity loan, says Vikram Gupta, executive vice president and head of home equity for PNC Bank.
Do read the fine print of your agreement, though. “Additionally, some HELOCs may have various fees associated with them such as annual fees, early closure fees, and origination fees, so borrowers should pay close attention to these when evaluating their total financing costs,” says Gupta.
On the downside: HELOCs aren’t as easily attainable — you need a strong credit score — and, given their fluctuating interest rates, can mean variable monthly repayments.
Reverse mortgage on a paid-off home
If you’re 62 or older, you could be eligible for a reverse mortgage. This financing vehicle gets you regular payments from a mortgage lender in exchange for your home’s equity.
“A reverse mortgage can be a great way for seniors to access the equity in their homes to pay for monthly living expenses and keep them living independently, especially if they don’t have monthly income in retirement,” says Brown.
Reverse mortgages have pros and cons, though. You’ll still need to keep up with homeowners insurance, property tax and HOA dues payments to avoid foreclosure, and there’s a limit to how much money you can get. You can’t let the home fall into disrepair either — you’ll still be responsible for maintenance.
Most of all: “It’s important for the borrower’s survivors to understand that the entire [reverse mortgage] balance, plus interest and fees, is due if the borrower passes away,” says Gupta. “The borrower’s house may need to be sold if their estate cannot repay the reverse mortgage loan.”
Shared equity agreement on a paid-off home
With a shared equity agreement — a relatively new method of liquidating equity — you’ll sell a portion of your future home equity in exchange for a one-time cash payment.
“The details on how this works and what it costs will vary from investor to investor,” says Andrew Latham, CFP, CPFC, content director and managing editor for SuperMoney.com. “Let’s say you have a property worth $600,000 with $200,000 in equity built up. A home equity investor might offer you $100,000 for a 25 percent share in the appreciation of your home.”
If your home’s value increases to $1 million after 10 years — the typical term for a home equity investment — you’d have to return the $100,000 investment plus 25 percent of the appreciation, which in this case would be $100,000. You’d also need to return the investment plus the share of appreciation if you sell the home.
“The advantage here is that you can tap into your home’s equity without getting into debt,” says Latham, “and there are no monthly payments, which is a great plus for homeowners struggling with cash flow.”
In effect, you’ll have a silent partner in your home, so you’ll need to be comfortable with that and the rights that partner has to protect their investment.
Pros of tapping equity on a paid-off house
Easier to get approved
On the plus side, it can be relatively easy to qualify for a home equity loan on a paid-off house since you already have a solid track record of paying off your first mortgage, which likely means you’re older and have good credit and possibly a higher income. This ups your creditworthiness as a borrower, making you a preferred candidate to lenders and lowering the interest rate you’ll pay.
You also won’t have to worry about the size of your ownership stake or loan-to-value ratio — two other criteria that lenders look at, and that affect how much you’re able to borrow.
No-strings money
Furthermore, you can use your equity for any reason. Most lenders won’t care, for instance, if the money will be put toward funding retirement, seeding a new business or making a down payment on an investment property.
“Many seek to pay for their children’s educational expenses, fund their retirement or pay for an unexpected medical emergency like cancer care for a loved one,” says Kelly McCann, an attorney specializing in construction and real estate with Burnside Law Group in Portland, Ore.
Avoid capital gains taxes
In addition to being able to use the money for nearly any purpose and being more likely to qualify, tapping into your home equity also has the potential to save you money on your income tax.
“It may be smarter to tap into your equity than selling your home and downsizing,” says McCann. “If you have capital gains on your home of more than $250,000 (or more than $500,000 if you are a married couple) you must pay taxes on that gain after the sale of your home. However, if you borrow against your home by, for example, taking out a home equity loan, you don’t have to pay taxes on the loan proceeds — you get the money tax-free.”
Cons of tapping equity on a paid-off house
Risk of losing your home
Of course, if you choose a form of financing wherein your home is used as collateral, like a cash-out refinance or home equity loan, there’s always the risk that you could lose your home if you can’t repay.
Upfront expenses
While they often carry lower interest rates than unsecured loans, home equity products aren’t free. Most have upfront expenses and many of those good old closing costs that you remember all-too-well from your first mortgage. You’ll have to come up with the funds to pay for expenses like origination fees and a home appraisal, to name a few. The whole process could be paperwork-heavy and time-consuming, too.
Being frivolous with funds
You’ve got a tempting chunk of change there in your home. But you’ve worked long and hard to acquire this asset, so don’t blow it on one-time, discretionary expenses. Buying a car (a depreciating asset), paying for a wedding or taking a vacation — these are not-so-good reasons to deplete your equity stake.
How much equity am I able to cash out of my home if it’s fully paid off?
Even if your home mortgage has been paid in full, which means you have 100 percent equity, you cannot borrow all of that money. Generally, lenders allow for borrowing up to 80 to 85 percent of a home’s appraised value. That means if your home is worth $500,000 you may be able to access as much as $425,000 of that equity. However, the specific limit also varies by lender.
Bottom line on getting equity out of a paid-off home
Determining whether it makes sense to pull equity out of a house you’ve already paid off really comes down to your unique circumstances and financial picture, as well as your short- and long-term goals. It’s also important to consider whether you’d be able to make the payments on the loan if your financial circumstances were to change unexpectedly.
“Homeowners should ask themselves: ‘What is the purpose of the funds needed?’ They also need to assess their individual financial situations to ensure they have the cash flow to pay off the loan in the future, particularly as they approach retirement,” says Gupta.
If you decide to proceed, make sure to practice the due diligence you would apply to any other financial transaction—shop around with several lenders and find the best terms for your needs.
FAQs
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A home equity line of credit, or HELOC, is typically the most inexpensive way to tap into your home’s equity. When opening a HELOC, you only pay interest on the money you actually use. As an added bonus, when using a HELOC, you won’t pay all the closing costs that come with a home equity loan or a cash-out refinance on a paid off home.
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Lenders typically look for credit scores of at least 620 on home equity loan applications. You’ll qualify for an even better rate with a score of 700 or above.
A mortgage involves a lot of paperwork, from the stack of documents you’ll get at closing to the statements you’ll continue to receive from your lender as you pay down your loan. You might be wondering how long to keep these statements and other mortgage documents, and if you need to keep every single one — especially in our digital age.
Many experts advise holding onto certain mortgage documents for the life of your loan or beyond, or at least until you sell your home. “Even if you pay off your mortgage, it is a smart idea to keep the paperwork,” says Roselina D’Annucci, a New York-based attorney with Serrano & Associates PC.
Ah, but exactly which documents do you need to keep after paying off a mortgage? And what sort of paperwork do you need to hang onto, after you’ve sold a home?
Here’s what to know about how long to keep mortgage statements and other home-related documents — and specifically, what can go and what can stay.
Even if you pay off your mortgage, it is a smart idea to keep the paperwork. Once you sell and there are no future tax implications associated with the sale of that property, your paperwork may be discarded.
— Roselina D’Annucciattorney, Serrano & Associates PC
How long should you keep mortgage statements?
Before we look at how long to keep mortgage statements and other paperwork, let’s get clear on which documents are worth saving and what they do for you.
When you buy a home, you’ll receive several important pieces of paper, including:
- Deed – The deed indicates your ownership of the home and is signed by you and the seller, explains real estate investor Warner Quiroga, president and owner of Prestige Home Buyers in Long Island, New York. “The main job of a deed is to move the legal rights of a property from one person or business to another,” he explains.
- Promissory note (mortgage note) – This is the legal contract, in which you promise to repay the debt you took on with interest and agree the home is collateral for the debt. “Some states use a document called a deed of trust for this,” Quiroga notes.
- Purchase agreement or contract – Signed by both you and seller, this document typically includes the price paid for the home, closing date and other essential details.
- Home inspection report – A detailed report from a professional home inspector with notes indicating your home’s condition, including possible issues.
- Closing disclosure – “This form summarizes the final details of your mortgage loan and the property sale,” Quiroga explains. “It tells you things like the amount, length and type of your loan, the interest rate, the overall costs and the escrow fees.”
- Seller disclosure document – This spells out other details about the home that the seller is aware of. “It tells you about the condition of the house and any known problems that might influence its value or safety,” such as structural defects or hazards like asbestos or lead paint, Quiroga says.
- Title insurance document – This document from the settlement or title company includes information about your title insurance policy, which protects the lender (and you, if you opt for this coverage) from issues with the property’s title.
- Addendum and amendments – These documents specify any alterations or changes not present in the original purchase and sale agreement (signed when your home offer was accepted).
- Buyer’s agent agreement – “This piece of paper is a contract between you and your real estate agent,” Quiroga says. “It usually explains how the agent will work for you and how they will be paid.”
Some of these papers can go fairly soon. “The agent’s agreement and addendum documents can be discarded after as little as three years, since the statute of limitations for IRS auditing is up to that time,” Quiroga says. While Quiroga recommends tossing the home inspection report, too, other authorities recommend that you keep it — if nothing else, to have evidence of the home’s condition when you bought it.
With everything else, it’s best to hang onto the paperwork for the life of your mortgage.
What information your mortgage statements contain
But wait, you might be thinking. We haven’t explained how long to keep mortgage statements.
Once you begin making monthly mortgage payments, you should receive these statements by mail, email or uploaded to an online account from your lender or servicer. The statements may include details such as:
- Upcoming payment information: You’ll be able to see the amount of your next mortgage payment, with a breakdown of how much is going towards the principal and interest. Escrow account (for homeowners insurance and property taxes) and fee totals will be listed as well.
- Loan and account details: Your statement will include basic information about your loan, including your account number and your property’s address. You should also see the outstanding balance on your mortgage, your current interest rate and maturity date (when your loan will be completely paid off). If there’s a prepayment penalty on your mortgage, you might see that, as well.
- Transaction history: Like a bank statement, this section will show any charges and payments you’ve made since the last billing cycle.
- Past payment breakdown: Here, you’ll get a glimpse of the progress you’ve made on your mortgage balance. It can include a look at what you paid last month and so far this year.
- Contact information: This section will give you options for getting in touch with your loan servicer.
Mortgage statements have a very short shelf life, so they can be destroyed or shredded whenever you choose. “Since the information contained on monthly statements is always changing, there’s no need to keep them for any prolonged period of time if you don’t want to,” says Than Merrill, CEO of FortuneBuilders, a real estate investor coaching firm. Those documents can absolutely go fairly soon — or even immediately, if you can access them online. At most, you might keep one on hand, in case you need to furnish proof of your mortgage details or home address for some reason.
Which mortgage statements are most important to keep?
While you can get rid of your monthly mortgage statements, there are some other documents that you should keep as long as you own the home. These include:
- Deed: “Above all, never throw away or remove the deed to your home, as this is by far the most important document to keep,” says Leonard Ang, CEO of iPropertyManagement, an online resource for landlords, tenants and real estate investors. The deed proves that you own your home. If you sell your property, you’ll need to transfer the deed to the new owner.
- Purchase agreement and seller’s disclosures: These documents have certain details about your home’s condition. If any issues develop with your home, you can check to see if the problems were outlined here.
- Closing documents, including the closing disclosure, deed of trust or mortgage note: These are important to keep because they outline the financial and legal agreements of the transaction, including the terms and costs of your loan and repayment obligation.
- Home inspection report and home warranty: Because it contains specifics about the state of your home, the home inspection report may come in handy for future maintenance or renovation/remodeling projects. Similarly, if you have a home warranty, it will detail what’s covered under your policy, which you’ll want to check before replacing any appliances or home systems. “A homeowner should indefinitely hold onto any documents that detail the state of the home,” Merrill says. “While they may not sound necessary to keep at first, there’s always the chance they will come in handy in the future.”
- Property survey: This document shows your property lines, which is useful if you want to build on your land.
If you ever move onto a new property, you’ll probably ask, “Do I need to keep old mortgage documents after selling the home?” Generally, you should keep this documentation until the next tax cycle just to be safe. Then, you can shred it.
You might also wonder, “What documents do I need to keep after paying off the mortgage?” Generally, it’s a good idea to keep everything cited here until you part with the property, even if it pertains to a loan you’ve fully settled. We’ll explain why in more detail in the next section.
Why is it important to keep mortgage documents?
Now that we’ve given you an overview of how long to keep mortgage documents, you’re probably curious why you need to save this small mountain of paperwork. In short, if a title, insurance, tax or legal question arises, your mortgage paperwork can prove invaluable. “For instance, your homeowners insurance agent may request some of this paperwork, particularly if there is an insurance claim involved,” Ang says.
Let’s say you’ve paid off your mortgage and are ready to sell your home. If your mortgage lender never filed a satisfaction of mortgage with the local recording office for some reason, your mortgage documents could save you from a dispute during the sale. “The easy fix is to hand over the document that you saved, pertaining to your payoff, whether it is a letter acknowledging payoff or the payoff itself,” D’Annucci says.
Other reasons you might need your mortgage statements include determining your capital gains tax liability, preparing for a major remodeling project and having documentation in case you get audited.
But most crucially, you might need these documents if you ever face foreclosure. “The majority of my clients facing foreclosure did not keep their original documents, which may be used as a defense that could possibly win your case and, in some cases, wipe out the mortgage itself due to errors or non-compliance of certain laws and regulations,” D’Annucci says.
The lesson here? “Keep everything,” declares D’Annucci. “You never know what challenges you may face in the future that your carefully preserved paperwork can help resolve.”
What is the best way to store mortgage paperwork?
Ideally, you should store original paper mortgage documents within a fireproof and waterproof safe in your home or in a safe deposit box at your bank. At the very least, store paper documents in a carefully organized file cabinet that you can lock. “Try to organize your papers in a binder or folder,” Ang says. “Chronological order may be most helpful, with indicator tabs showing the month and year.”
It’s also smart to keep a digital copy of your mortgage documents in cloud-based storage or on a hard drive.“Just be aware that a hard drive can be lost, and cloud-based storage can be hacked,” Quiroga says. “Plus, digital copies can be altered. That’s why holding onto the original paperwork is wise.”
If you decide to discard any of these documents — and you shouldn’t until you sell the home, at the earliest — don’t simply throw them away in the trash. “All sensitive content should first be removed before discarding, including your account numbers, Social Security number and date of birth that can be redacted by using a redaction pen or stamp,” D’Annucci says.
After that, you can either thoroughly shred or completely burn the paperwork, provided no remnants remain.
What to do if your mortgage documents are lost or damaged
Lastly, if you’ve lost or damaged any original mortgage documents, don’t despair. You may have options to retrieve them or get replacements, says Gabriel Freitas, Broker/Owner at Voyant Realty in Andover, Mass.
However, he advises homeowners to keep a close eye on the “original note from a closing package, as well as any discharges when mortgages are refinanced or paid off.”
“Other documents can be obtained if you lose them, but those two are the ones you might need most, so having them handy is a good idea,” he says.
Many companies that participate in real estate transactions — like lenders and title companies — keep this type of paperwork on file. If, for some reason, you need a physical copy of a particular document, the company that was involved in that part of the deal may be able to send you a replacement.
“You may be able to request a duplicate document from your lending institution,” Quiroga says. “For lost deeds, you can contact your local recorder’s office and request a copy.”
Bottom line on keeping mortgage statements
In today’s digital world, there are a few areas where paper still rules. Mortgage and real estate title documents are among them. While it’s generally safe to toss out the monthly statements from your lender, you’ll want to hold onto anything relating to the original mortgage contract and terms (e.g., the promissory note or deed of trust, the closing disclosure) for at least as long as you own your home. These, along with other critical documents – including your ownership deed, purchase agreement and proof of title insurance — you should keep in their original, hard copy form.
You probably won’t have to pull out your mortgage documents very often, but you should still make sure that they’re kept somewhere safe and accessible for when you do need them.