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

You can, but it’s easier if the proceeds cover what you owe on both mortgages

Three people review documents.
•••

Sam Edwards / Getty Images

Perhaps you took out a home equity loan to use as a down payment on a new home. Maybe you have an existing HELOC on your home and are wondering what happens when you sell the house. As long as you’ve built some equity in your home, and your home is worth more than you paid for it, you generally won’t have any issues selling.

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.

Key Takeaways

  • A home equity loan or home equity line of credit (HELOC) allows you to rely on equity from your house to fund a loan.
  • Home equity loans and HELOCs use your house to secure the loan and ensure you make on-time payments.
  • When you sell your house, the proceeds of the sale pay off your home equity loan and your primary mortgage.
  • If your house is worth less than your loan or HELOC, you may need to wait for home value to rise before selling, or pay off the difference out of your own funds. 

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 use your house as collateral for the loan, just like your primary mortgage. If you fail to repay your loan or make on-time payments, the lender can force you to sell your home.

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
  • Home sale proceeds can pay off the loan

  • Reduced interest expense

  • Positive credit impact

Cons
  • Risk of complications if underwater

  • Loss of credit line

  • Possible prepayment penalties

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 taxes
  • Property taxes
  • Property owners association dues
  • Manufactured home payments
  • City 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.

Frequently Asked Questions (FAQs)

How do I pay off a home equity loan faster?

Here are a few ideas for paying off a home equity loan more quickly, as long as you aren’t hit with any prepayment penalties:

  • Ask your lender or loan servicer if you can make biweekly payments instead of monthly payments
  • Make an extra payment every year equivalent to one month’s payment.
  • Divide a monthly payment by 12, and add the result to your monthly payment
  • Put any additional monthly funds toward paying down your loan, whether $5 or $50
  • Put gifts, tax refunds, and other bonus payments toward your home equity loan

How do I get paid when I sell my home?

The last stage of the transaction between buyer and seller is called “final closing” or “escrow.” This may be performed by attorneys, banks and lenders, independent escrow companies, or title companies. Typically, the buyer and seller visit the escrow agent’s office on the last day of the final closing. The escrow agent ensures that both sign any loan and real estate documents. The agent also verifies the transfer of purchase funds from buyer to seller, pays off any liens, and provides the seller with the remaining funds.

Article Sources

  1. Consumer Financial Protection Bureau. "TILA-RESPA Integrated Disclosure: Guide to the Loan Estimate and Closing Disclosure Forms," Page 93.

  2. Consumer Financial Protection Bureau. “What Is a Short Sale?

  3. Internal Revenue Service. “What if There Is a Federal Tax Lien on My Home?