If you have a home equity loan or home equity line of credit (HELOC), you may wonder whether you need to pay it off before selling your house. In most cases, having a home equity loan does not prevent you from selling.
Because a home equity loan or HELOC is secured by your property, the outstanding balance generally needs to be satisfied as part of the sale. This commonly happens at closing, when the closing or settlement agent uses the transaction funds to pay mortgages and other liens that must be cleared.
How Does a Home Equity Loan Affect Selling Your House?
A home equity loan allows you to borrow against the equity in your home, typically receiving the proceeds as a lump sum. A HELOC also uses the home as collateral but generally provides a revolving line of credit.
When you already have a primary mortgage, a home equity loan or HELOC is commonly secured by a second or junior lien on the property.
That lien does not normally mean you must pay off the home equity debt before putting your property on the market. Instead, the outstanding amount can typically be included among the obligations paid through the closing process.
How Is a Home Equity Loan Paid Off at Closing?
As closing approaches, the appropriate parties obtain payoff information for mortgages and other liens that need to be satisfied. The payoff amount can be different from the balance shown on your most recent statement because it may include interest and other amounts due through the expected payoff date.
At closing, funds from the transaction are distributed according to the applicable settlement instructions and obligations. Your first mortgage and any home equity loan or HELOC that must be satisfied are accounted for before the seller receives the remaining proceeds.
Federal Closing Disclosure rules specifically provide for first and second mortgage payoffs and other lien-related seller obligations to be shown as part of a covered real estate closing.
How Much Money Will You Receive From the Sale?
The amount left for you depends on more than the difference between your home's sale price and first mortgage balance.
A simplified calculation looks like this:
Sale Price - Mortgage Payoffs - Other Liens - Seller Closing Costs = Estimated Seller Proceeds
For example, imagine your home sells for $500,000 and you owe $275,000 on your first mortgage and $50,000 on a home equity loan. Before considering other transaction costs, $175,000 would remain after those two mortgage balances are paid.
Your actual proceeds would also reflect applicable closing expenses, credits, taxes, commissions or compensation arrangements, and any other obligations associated with the transaction.
What Should You Review Before Listing Your Home?
Getting a clearer picture of your equity before listing can help you avoid surprises later.
Review items such as:
- Your estimated first mortgage payoff
- Your home equity loan or HELOC payoff
- Other liens that may affect the property
- Your home's estimated market value
- Expected seller closing costs
- Real estate professional compensation under your agreement
- Potential taxes or other transaction expenses
- Any applicable early termination, annual, or other fees associated with a HELOC
Keep in mind that your mortgage statement balance is not necessarily the same as an official payoff amount. Your lender or servicer can provide the information needed to determine what must be paid to satisfy the loan.
What Happens if You Have an Open HELOC?
A HELOC requires additional attention because it is a revolving line of credit. Depending on the account, you may be able to borrow and repay funds during the draw period.
If you are preparing to sell, tell your closing or title professional that an open HELOC exists. The lender may have specific procedures for obtaining a payoff and closing the line so that the lien can be released.
A zero balance also does not necessarily mean an open HELOC lien has automatically disappeared from the property's title records. Confirm the account and lien status before closing.
What if You Owe More Than the Home Is Worth?
A sale becomes more complicated when the expected proceeds are not enough to satisfy the mortgages, liens, and transaction costs.
For example, if your first mortgage and home equity loan together exceed the amount available from the sale, you may need to provide additional funds or explore another solution with the affected lenders.
A short sale may be one possibility in some situations, but it generally requires lender approval and should not be assumed to be available. Multiple liens can make the process more complicated because the rights of more than one lender may need to be addressed.
If you believe your sale proceeds will be insufficient, identify the potential shortage early and speak with your mortgage servicers, real estate professional, title or closing professional, and an attorney or tax professional when appropriate.
Can You Use Home Equity to Buy Your Next House Before Selling?
Some homeowners consider using a home equity loan or HELOC to help fund a down payment or other expenses for their next home before selling the current property.
That strategy can create additional financial obligations. A lender evaluating your next mortgage may need to account for payments associated with your existing home and home equity debt, depending on the transaction and applicable underwriting guidelines.
It is important to understand how carrying both properties and multiple loans could affect your cash flow and mortgage qualification before borrowing additional equity.
How Can You Prepare for a Smoother Sale?
Start by identifying every loan or lien secured by the property. Provide that information to your title company, closing agent, or attorney early enough for accurate payoff information to be obtained.
You can also estimate your likely proceeds using a realistic expected sale price rather than relying only on an online home value estimate.
If your equity appears limited, knowing that before accepting an offer gives you more time to evaluate the sale price, transaction expenses, outstanding debt, and any funds you may need to bring to closing.
The Bottom Line
Yes, you can generally sell a house that has a home equity loan or HELOC. Because the debt is secured by the property, the outstanding lien normally needs to be addressed as part of transferring clear title to the buyer.
In a typical sale with sufficient equity, the required mortgage and home equity payoffs are handled through closing, along with other applicable transaction expenses. You then receive the remaining proceeds.
The key is understanding your expected payoff amounts and net proceeds before you sell. If you are planning to sell a Florida home and purchase another property, Loan Wolf Lending can help you review mortgage financing options for your next home. Call 754-755-3075 to discuss your plans.