How Does Selling a House Work With a Mortgage?

Selling a home while still carrying a mortgage is a common occurrence for many homeowners. This process is manageable with proper understanding of the financial and procedural aspects involved. It requires careful attention to your existing mortgage obligations and an accurate assessment of the costs associated with the sale. Navigating these details effectively can help ensure a smooth transaction and a clear financial outcome as you transition to your next property.

Understanding Your Mortgage Before Listing

Before listing your home for sale, obtaining a comprehensive understanding of your existing mortgage is a foundational step. The most precise way to do this is by requesting a mortgage payoff statement from your loan servicer. This document, distinct from your regular monthly statement, provides the exact amount required to fully satisfy your loan on a specific date, often referred to as the “good through” date.

A payoff statement details several components that contribute to the total amount owed. It includes your remaining principal balance, any accrued interest since your last payment, and a calculation for “per diem interest.” Per diem interest is the daily interest charged from your last payment date up to the anticipated payoff date, calculated on a daily basis. The statement also itemizes any outstanding fees, such as late charges or administrative costs, and will explicitly state if a prepayment penalty applies to your loan.

Prepayment penalties are fees charged by some lenders if you pay off your mortgage before a specified term, typically within the first three to five years of the loan. These penalties can be calculated as a percentage of the remaining loan balance, often between 1% and 2%, or as a certain number of months’ interest. While federal law limits these penalties to a maximum of 2% of the loan amount, review your original loan documents to determine if such a clause exists and how it is calculated.

Your mortgage servicer also manages an escrow account, which typically holds funds for property taxes and homeowner’s insurance. When you sell your home, this escrow account is no longer needed for its original purpose. Any remaining funds in your escrow account after all outstanding tax and insurance obligations are covered will be refunded to you after your mortgage is fully paid off.

Estimating Your Net Proceeds

Calculating your estimated net proceeds is a fundamental step in financial planning when selling your home. This involves taking your anticipated sale price and subtracting all associated costs, including the payoff of your existing mortgage. Understanding these expenses in advance allows for a more accurate projection of the funds you will receive after the sale concludes.

A major expense for sellers is real estate agent commissions, which typically constitute the largest portion of selling costs. These commissions, which cover both the listing agent and the buyer’s agent, average around 5.44% of the home’s sale price nationally. This percentage can range from approximately 4% to 7% or more, depending on market conditions and negotiations.

Beyond commissions, sellers incur various closing costs, generally ranging from 1% to 4% of the sale price. These costs cover services essential to the transaction. Owner’s title insurance policy, which protects the buyer from future claims against the property’s title, is a common seller expense. Escrow or settlement fees compensate the neutral third party managing the transaction.

Another cost is transfer taxes, which are one-time fees imposed by state or local governments on the transfer of property ownership. These taxes vary significantly by jurisdiction, often calculated as a percentage of the sale price, and who pays them depends on local practice. Additionally, recording fees are paid to the local government to officially register the new deed and other transaction documents. In some regions, attorney fees are also incurred.

Sellers are also responsible for prorated property taxes and, if applicable, homeowners’ association (HOA) fees up to the closing date. Proration ensures that each party pays for the period they own the property within the current tax or billing cycle. Finally, seller concessions are negotiated agreements where you might cover a portion of the buyer’s closing costs or offer credits for repairs, which directly reduce your net proceeds.

To estimate your net proceeds, the calculation is straightforward: take the final sale price of your home and subtract your outstanding mortgage payoff amount, the total real estate agent commissions, and all other seller-paid closing costs, including any agreed-upon seller concessions. This comprehensive calculation provides a realistic estimate of the funds you can expect to receive at the completion of the sale.

The Role of Your Mortgage at Closing

The culmination of selling your home occurs at the closing, where the existing mortgage is officially resolved. At this stage, the process shifts from estimation and preparation to the actual execution of the financial transaction. The mortgage payoff is handled directly from the sale proceeds, ensuring a seamless transfer of ownership.

The title company, escrow agent, or closing attorney plays a central role in facilitating this payoff. This neutral third party is responsible for collecting the buyer’s funds. They will have obtained a precise mortgage payoff statement from your lender, detailing the exact amount required to clear your loan on the closing date. This ensures that the correct amount is remitted to your mortgage servicer.

Once the funds are collected, the designated closing agent directly remits the payoff amount to your mortgage lender. This extinguishes your outstanding home loan. Following the mortgage payoff, the lender is legally obligated to release the lien on your property. This is accomplished by recording a mortgage release document with the county recorder’s office where the property is located. This official recording removes the lender’s claim, confirming the property is free of that encumbrance.

After the mortgage has been satisfied and all other seller-related costs, such as real estate commissions, title insurance, and prorated taxes, have been deducted from the sale proceeds, the remaining balance constitutes your net proceeds. These funds are then disbursed to you, typically via a wire transfer or a cashier’s check.