What Happens to a HELOC When You Sell Your Home?

A Home Equity Line of Credit (HELOC) is a flexible financial tool that allows homeowners to borrow against the equity they have built in their property. It functions as a revolving line of credit, similar to a credit card, but it is secured by the borrower’s home. When a homeowner decides to sell their property, understanding how a HELOC is handled during the sale process is important for a smooth transaction. The presence of a HELOC requires specific actions to ensure the property’s title is clear for the new buyer.

Understanding Your HELOC

A Home Equity Line of Credit (HELOC) is a type of second mortgage, secured by your home. This financial product allows you to access funds up to a set credit limit, drawing money as needed rather than receiving a single lump sum. The lender places a lien on the property, establishing a legal claim against it.

HELOCs consist of two phases: a draw period and a repayment period. During the draw period, often lasting around 10 years, you can borrow, repay, and re-borrow funds, usually making interest-only payments on the amount used. Once this period ends, the repayment period begins, lasting 10 to 20 years, during which you can no longer draw funds and must repay both principal and interest. This lien means the HELOC must be addressed when the home is sold to transfer clear ownership to a new buyer.

The Repayment Process at Closing

When a home with an active Home Equity Line of Credit (HELOC) is sold, the outstanding balance on the HELOC must be paid off as part of the closing process. This is because the HELOC represents a lien on the property, and a clear title is required for the sale to proceed.

Prior to closing, the title company requests a payoff statement from the HELOC lender, which details the exact amount needed to satisfy the debt. At the closing, funds from the home sale proceeds are directed to an escrow account managed by the title company. From this account, the HELOC balance is paid directly to the lender. Once the HELOC is paid in full, the account is closed, and the lender is responsible for recording a “lien release” or “satisfaction of mortgage” with the appropriate county recorder’s office, formally removing their claim on the property.

Specific Repayment Situations

One scenario involves insufficient sale proceeds, where the home’s sale price is not enough to cover both the primary mortgage and the HELOC balance. In such cases, the primary mortgage is paid first due to its senior lien position. If a shortfall remains, the homeowner is responsible for bringing the necessary funds to closing to pay off the HELOC, or they may need to explore options like a short sale.

Another situation occurs when the home is sold during the HELOC’s draw period. Even if the draw period is still active, the HELOC balance must be paid off and the line of credit formally closed at the time of sale. The ability to draw new funds ceases, and the entire outstanding balance becomes due. Furthermore, if a homeowner obtained a HELOC but never drew any funds, resulting in a zero balance, the HELOC still represents an open line of credit and a recorded lien on the property. For a clear title transfer, this zero-balance HELOC must also be formally closed and the lien released by the lender at closing.

After the Sale

After the home sale closes and the Home Equity Line of Credit (HELOC) is paid off, the former homeowner should take a few follow-up steps. The first step involves confirming with the HELOC lender that the account is officially closed and has a zero balance. This verification helps prevent any future billing errors or issues.

It is also important to ensure that the lien release, also known as a satisfaction of mortgage, has been properly recorded in the public records of the county where the property is located. This legal document formally removes the HELOC lender’s claim on the property, ensuring the title is clear. If any discrepancies arise or if the lien release is not recorded within a reasonable timeframe, the former homeowner should contact the title company and the lender to resolve the issue. Retaining all closing documents, including the Closing Disclosure and any payoff statements, is important.