Can I Sell My House If I Have a Home Equity Loan?

Selling a home involves various financial obligations, and a home equity loan (HEL) or home equity line of credit (HELOC) adds another layer of consideration. It is possible to sell a house with either in place, and it is a common occurrence in real estate transactions, though it requires careful attention to the repayment process.

How a Home Equity Loan Affects Your Sale

A home equity loan or line of credit (HELOC) functions as a second lien on the home, meaning the property serves as collateral for the debt, similar to a primary mortgage. For a clear title to be transferred, all existing liens, including the home equity loan or HELOC, must be paid off at the time of sale.

A home equity loan provides a lump sum, repaid over a fixed term with a fixed interest rate. A HELOC offers a revolving credit line, drawn upon as needed, often with a variable interest rate. Both are secured debts, meaning the lender has a claim against the property until repayment.

The closing agent obtains an accurate payoff amount directly from the home equity lender. This amount includes the remaining principal balance, any accrued interest, and potential fees.

The closing agent uses sale proceeds to pay off the home equity loan or HELOC. This payoff typically occurs simultaneously with the primary mortgage, if one exists, as part of the closing process. Clearing all secured debts allows for the transfer of a clean title to the buyer.

Financial Considerations at Closing

The payoff of a home equity loan or HELOC directly influences the net proceeds a seller receives. The gross sale price first covers all outstanding liens, including the primary mortgage and home equity loan. Various closing costs are also deducted.

Seller closing costs typically range from 6% to 10% of the sale price. These can include real estate commissions (often 5-6%), title fees (0.5-1%), escrow fees, and transfer taxes. Title fees cover services like title searches and insurance. Escrow fees compensate the third party managing the transaction. Transfer taxes are a one-time fee on property ownership transfers that vary by location.

With sufficient equity, the sale price covers all outstanding debts, including the primary mortgage, home equity loan, and all associated closing costs. The remaining funds are then disbursed to the seller as net proceeds. For example, if a home sells for $400,000, and combined mortgage/home equity loan balances are $250,000 with $30,000 in closing costs, the seller receives $120,000.

If the sale price is insufficient to cover all liens and closing costs, the seller faces an insufficient equity situation. The seller would then need to bring additional funds to closing to cover the shortfall. Obtaining an accurate payoff statement from the home equity lender in advance helps anticipate any need for additional funds.

Preparing for the Sale

Homeowners should contact their lender early to request a payoff statement or estimated payoff amount. This statement details the current balance, including any per diem interest.

Inquire about potential prepayment penalties or fees associated with closing the loan. Some lenders may impose a penalty, especially if the loan is closed within a few years of its origination. These fees can range from 2% to 5% of the loan amount or be a flat fee.

Review the original home equity loan or HELOC agreement to understand its specific terms regarding early payoff. The agreement outlines any clauses related to early termination, including penalty conditions. Understanding these terms helps in financial planning for the sale.

Engaging experienced professionals can streamline the selling process. Consult a real estate agent experienced with properties carrying multiple liens, and work closely with a qualified closing agent or attorney. These professionals provide expert guidance on procedures and requirements, helping navigate financial obligations.

Budget for all potential closing costs beyond the loan payoffs for an accurate estimation of net proceeds. This includes real estate commissions (often the largest selling expense), along with title fees, transfer taxes, and other miscellaneous fees. Understanding these costs allows homeowners to prepare financially.