What happens to my HELOC if I sell my home?
Can you sell your house if you have a HELOC?
Yes, having a HELOC or home equity loan on your home does not usually complicate the home sale process. When you sell your home, proceeds from the sale will be used to cover the outstanding balance on your primary mortgage, HELOC or home loan, and any other liens on the property. This only becomes complicated if there is more owed on your home in debt than is made on the sale of the house.
Overview:
It is typically not difficult to sell a home if you have a HELOC or home equity loan secured by the property
Proceeds from the home sale will be used first to pay off the primary mortgage, followed by secondary liens such as HELOCs and home equity loans
Problems can arise if the current market value of your home is less than the total owed in the mortgage, HELOC, and any additional liens
What happens to my HELOC if I sell my home?
For many homeowners, selling their property with a HELOC isn't an issue. If the sale closes successfully, the remaining balance on the HELOC will be taken out of the proceeds of the sale along with any mortgages that are still outstanding. This usually happens without creating any problems. If there is an outstanding balance after the home sale, the borrower will be required to pay the remaining balance on the HELOC at the time of closing, since they will no longer own the home securing the loan.
Factors that influence how a HELOC will affect a home sale
When you have a HELOC, selling your house can be a bit more complex. If you have taken out a HELOC or home equity loan on your property, the proceeds from your home sale will be used to pay off your primary mortgage and your secondary loan or line of credit. If your house is worth less than what you owe in combination with your primary mortgage and HELOC, it may make sense to hold off on selling.
How much equity you have
The primary factor to consider is whether or not there’s substantial equity in the home. If you've built up enough equity in the property since you bought it and the value has increased, then selling shouldn’t be too difficult – as long as you can make up any difference between what's owed on the HELOC and what your house sells for. However, if market values have dropped since you purchased, or if there are other liens that need to be factored in (such as another second mortgage) then it may not be wise to list your home with a home equity loan attached.
In order to determine if selling your home when you have a home equity loan makes sense, it’s important to assess all of the factors at play and do some math based on current market prices for houses like yours. Pay attention to real estate trends in your neighborhood and speak with an experienced real estate agent and financial adviser before determining whether now is the best time for you to list your house on the market.
Pay attention to the Truth in Lending Real Estate Integrated Disclosure (TRID)
Before closing is complete, you will be given a Truth in Lending Real Estate Integrated Disclosure (TRID) form three days beforehand. This form outlines all of the payoffs for existing liens such as mortgages and home equity loans, any additional funds needed to close the transaction, as well as your net proceeds at escrow's end. Knowing ahead of time how much money needs to be accounted for makes it easier to navigate through closing and ensure that everything goes smoothly.
Should I repay my HELOC before selling?
Home equity lines of credit (HELOCs) are a common financial tool for homeowners to access cash from the equity in their homes. Because of this, it is not uncommon for home sales to take place when there is a HELOC or home equity loan attached to the home. Most often there are no additional complications involved when you sell a home that secures a HELOC unless the home is worth less than the total debts on the property.
Benefits of selling your home when you have a HELOC
Paying off your mortgage and home equity loan can be one of the most rewarding actions you can take as a homeowner. The first pro is that when you have sufficient equity, the sale proceeds from your home can pay off both loans which allows you to become debt-free much faster. Furthermore, by doing so, you no longer have to worry about interest payments that would have been incurred over the life of the loan.
The second benefit is that paying off your loans in full can also have a positive impact on your credit score which could help when seeking out additional borrowing opportunities. By meeting all terms of your loan agreement and making on-time payments throughout, demonstrates to other lenders that you are a responsible borrower who takes their financial obligations seriously. This could ultimately provide access to better borrowing terms in the future should you decide to take out another loan.
Drawbacks of selling your home when you have a HELOC
The loss of your home equity line of credit (HELOC) is one of the biggest potential drawbacks to selling your home. If you use a HELOC to finance part of the purchase, you will lose that line of credit when you pay it off at the time of sale. This means there will no longer be any access to additional funds from this source and any other financing options may have stricter terms and conditions or higher interest rates.
The risk of complications can occur if the value of your primary home drops below the amount owed on either your mortgage or mortgage plus home equity loan. In these situations, there may not be enough in sale proceeds to repay the HELOC loan which could result in out-of-pocket costs for the seller or a short sale. Certain mortgages also carry prepayment penalties if they are paid off early, so it’s important to ensure that stepping out of your mortgage won’t trigger those penalties before entering into an agreement with a buyer.
The bottom line
HELOCs are a commonly used form of financing in which one's house is used as collateral for the amount loaned. This means that if you fail to repay your loan or make on-time payments, the lender can force you to sell your home. When the home is sold, both the remaining principal of any HELOCs or second mortgages along with the primary mortgage is paid off using funds from the buyer.
