However, if home values and prices have dropped since you bought your home, or you have other liens to consider, you may think twice about selling with a home equity loan now versus waiting.
How To Sell Your Home With a Home Equity Loan
A home equity loan can allow you to borrow a one-time, large fixed amount of money you’ll repay over a fixed term. Alternately, a home equity line of credit (HELOC) is a line of credit, much like a credit card that allows you to “borrow” against the value of your home. Both types offer a loan or credit based on the amount of equity (or ownership) you have in your home. Equity is basically the difference between what you owe your lender and what your home is worth. Home equity loans and HELOCs can have different payment plans—whether you send in a minimum monthly payment that includes the principal or an interest-only payment that ends in a one-time balloon payment. No matter the type of payment plan, when you sell your home, you’ll pay off the remaining principal of your HELOC or second mortgage along with your primary mortgage, using the funds paid by the buyer (home-sale proceeds). Before closing, the escrow agent will provide you with a Truth in Lending Real Estate Integrated Disclosure (TRID) form three days before your home closes and the sale finalizes. The TRID shows you the payoffs on any existing liens such as your mortgage and home equity loan; any funds you must bring to close the transaction (if you are underwater, for example); and your net proceeds, or the amount owed to you at the close of escrow. After paying off your home equity loan in full, you are no longer responsible for making monthly payments toward the loan, including any interest payments.
Repaying Your Home Equity Loan in an Up Market
Here’s an example: You have a home you estimate is worth $800,000 that you bought 10 years ago. You’re making payments to your bank toward the $400,000 you owe on the primary mortgage and a home equity loan or HELOC you still owe $50,000 on, which you used to renovate the kitchen and bathroom several years ago. You accept an offer of $805,000 for your home. On closing day, the buyer’s funds are transferred via escrow. Using these funds, the escrow agent repays the primary $400,000 mortgage and the $50,000 home equity loan, leaving you with a profit of $355,000 before closing costs of around 10%.
Repaying Your Home Equity Loan in a Down Market
However, imagine the real estate market reversing drastically, and now your home is underwater. You bought the home a few years ago, and the house is worth $415,000, dropping in value from when you purchased it at $500,000. You’re making payments toward the $400,000 you owe and a $25,000 HELOC you took out to remodel. If you accepted an offer of $415,000 for your home, you would still owe another $10,000 to repay the HELOC. If you didn’t have the HELOC, you could still sell the home. But because the house is collateral for the HELOC, you must find a way to repay this loan before the home sale can close. You can use other funds, wait to sell your home until the housing market recovers, or request your lender to waive the amount owed in a short sale.
Pros and Cons of Selling With a Home Equity Loan
When you have plenty of equity, selling a home with a home equity loan isn’t a big deal. If you don’t have much home equity or you’re upside-down in your mortgage, you may be challenged.
Pros Explained
Home sale proceeds can pay off the loan: With sufficient equity, your home’s sale proceeds will pay off your first mortgage and any additional home equity loans.Reduced interest expense: After you pay off your loan principal in full, you aren’t responsible for further payments, including interest payments that would have been due over the life of the loan.Positive credit impact: If you made on-time payments and otherwise fulfilled the home equity loan’s terms, paying off the loan and your mortgage could indicate to other lenders that you’re a responsible borrower.
Cons Explained
Loss of credit line: When you pay off your HELOC at the time of sale, you no longer have access to that line of credit.Risk of complications if underwater: If your primary home’s value dips below the amount owed on the mortgage, or the mortgage plus your home equity loan, the sale proceeds may not be enough to repay your home equity loan, which could lead to out-of-pocket costs, a short sale, or other issues.Possible prepayment penalties: Some home equity loans may have prepayment penalties when paid off early.
Other Factors That Can Impact a Home Sale
Liens are legal notices attached to your home when you owe a creditor money. For example, suppose you owe money to the Internal Revenue Service (IRS). In that case, you may need to satisfy the tax lien using your equity before finalizing any sale or refinancing your home. Other types of liens may come from unpaid:
State income or business taxesProperty taxesProperty owners association duesManufactured home paymentsCity water and sewer charges
Like a home equity loan, liens are repaid from your sale proceeds as long as your home’s value is higher than what you owe to your mortgage lender and other lienholders.
The Bottom Line
Before approaching a real estate agent and beginning the home-sale process, request your payoff amount in writing from your home equity loan or HELOC lender. This will give you a good idea of what you must repay, in addition to the payoff amount on your primary mortgage.
Ask your lender or loan servicer if you can make biweekly payments instead of monthly paymentsMake an extra payment every year equivalent to one month’s payment.Divide a monthly payment by 12, and add the result to your monthly paymentPut any additional monthly funds toward paying down your loan, whether $5 or $50Put gifts, tax refunds, and other bonus payments toward your home equity loan
