Navigating the Process of Selling a House When You Have a Home Equity Loan

Having a home equity loan can complicate the process of selling your house As a homeowner, you may have taken out a home equity loan or line of credit to finance home improvements, consolidate debt, or access cash for other needs This second mortgage uses your home as collateral, allowing you to borrow against the equity you’ve built.

When you decide to sell your home, you’ll need to factor that home equity loan into the transaction. With the right preparation and understanding of the process, you can successfully sell your house even with an outstanding home equity loan balance. In this comprehensive guide, I’ll walk you through what you need to know.

How Home Equity Loans Work

Before diving into the specifics of selling a home with a home equity loan let’s review what exactly home equity loans are and how they function

• Home equity loans allow homeowners to leverage their home equity to borrow money. The equity is the current market value of your home minus what you owe on your mortgage.

• They act as second mortgages, with your home as collateral. The combined loan amounts of your first and second mortgages cannot exceed your home’s market value.

• Interest rates are often lower than other financing options like personal loans or credit cards. You may be able to deduct interest on your taxes.

• Repayment terms vary, often 10-30 years You make monthly payments of principal and interest

• Home equity loans give you a lump sum of cash upfront. A home equity line of credit (HELOC) provides revolving access to borrow against your equity when needed.

• Closing costs are similar to other mortgages. You may pay origination fees, appraisal fees, and other closing costs.

• If you fail to repay the home equity loan, the lender can foreclose on your home.

Now that you understand the basics of home equity loans, let’s look at how this debt impacts selling your property.

Can You Sell a House if You Have a Home Equity Loan?

The short answer is yes – having a home equity loan does not prevent you from being able to sell your house. However, it does mean there are additional steps and considerations during the sales process.

When you sell your home, the proceeds from the sale must first repay any existing loans secured by the property. Here is the typical order of repayment:

1. Primary mortgage
2. Second mortgages/home equity loans
3. Other liens on the property

The home equity loan balance will need to be repaid in full upon the sale closing. Most sellers plan to use proceeds from the sale itself to pay off their home equity loan debt.

As long as your property sells for enough to cover both your primary mortgage and home equity loans, this process is straightforward. However, declining home values or owing more than your house is worth can complicate matters.

The Pros and Cons of Selling When You Have a Home Equity Loan

Potential advantages of selling your home when you have an outstanding home equity loan include:

• Paying off high-interest debt with sale proceeds
• Becoming mortgage/debt-free more quickly
• Removing the risk of potential foreclosure on the equity loan
• Improving your credit score by repaying installment loan balances

However, there are also some potential drawbacks to be aware of:

• If your home value declines, you may owe more than you can sell it for
• Prepayment penalties may apply if your loan has them
• Loss of future access to borrow against your home equity
• Higher interest rates on future borrowing without your home as collateral
• Possibly owing additional funds out-of-pocket if sale proceeds don’t cover the full home equity loan payoff

Carefully considering these pros and cons will help you decide if selling now is your best option.

What Happens if You Owe More Than Your House Sells For?

Ideally, your home will sell for enough not just to repay your primary mortgage, but also fully pay off your home equity loan. However, with fluctuating housing markets, this isn’t always the case.

If you end up owing more than what your home sells for, you have a few options:

• Come up with the difference in cash to pay off your home equity loan – this may be necessary to complete the sale
• Negotiate with the lender for a short sale, deed in lieu of foreclosure, or other solution
• Consider loan modification programs that may help avoid foreclosure
• As a last resort, be prepared for potential foreclosure if you can’t repay the difference

This is why it’s critical to communicate with your home equity lender prior to listing your home. Confirm exactly what will be owed, discuss market value estimates, and understand all repayment obligations.

Repaying Your Home Equity Loan Before Selling

Some homeowners consider repaying their home equity loan balances before listing their home for sale. This can simplify the transaction and make your property more attractive to buyers.

However, it often doesn’t make financial sense to repay home equity loans early, especially if prepayment penalties apply. You’ll usually get better terms just folding your equity loan payoff into the transaction using sale proceeds.

Paying off high-interest debts like credit cards first typically provides better returns than prepaying low fixed-rate home equity loans. An exception may be if your loan has variable rates that look likely to increase.

How to Manage Your Home Equity Loan When Selling Your House

If you’ve decided moving forward with selling your home is the right choice, here are some tips to smoothly handle your outstanding home equity loan:

• Get a clear payoff statement from your lender showing the total balance and any potential prepayment fees.
• Consult real estate professionals to estimate your home’s current market value and projected sale price.
• Discuss options with your lender if you anticipate owing more than the projected sale proceeds. Don’t wait until closing to address this.
• Review the closing disclosure paperwork to ensure home equity loan payoff details are correct.
• Have a plan to cover any additional funds you may need to bring to closing if equity loan payoff exceeds sale proceeds.
• Use a portion of sale proceeds to pay off the equity loan balance as outlined in closing documents.
• Confirm the home equity loan shows paid and closed following the transaction – you should get a final account statement.

With the right preparation, understanding the process, and working closely with your lender, successfully selling a home with an outstanding home equity loan balance is very feasible. Just be sure to address any potential complications proactively.

Frequently Asked Questions About Selling a House with a Home Equity Loan

Can you sell a house with a home equity loan?

Yes, you can sell a house if you have a home equity loan, but the loan must be repaid when you sell. Sale proceeds are typically used to pay off the balance.

What if I owe more than my house sells for?

If your home sells for less than you owe on loans, you’ll need to pay the difference to satisfy the home equity loan. Discuss options like short sales with your lender.

Do I have to repay my home equity loan before selling?

You do not need to repay your home equity loan before selling. The balance can be paid directly out of the sale proceeds when you close.

Are there fees for selling with a home equity loan?

Sometimes – be sure to ask if your loan includes early repayment penalties or prepayment fees if you sell and pay if off early.

What happens to my home equity line of credit (HELOC) when I sell?

Your HELOC will need to be closed and paid off entirely using funds from the sale of your home. You will no longer have access to borrow against the home equity.

In Summary

Selling a house when you have an outstanding home equity loan is possible with some additional considerations during the transaction. Be sure to communicate with your lender early and often, determine if you’ll have sufficient equity, and have a plan to cover any gap between sale proceeds and loan payoffs. Manage the process carefully, and you can successfully complete the sale.