Can I sell my home if I have a HELOC?
In most cases, it's possible to sell a home with a HELOC. However, the HELOC balance must be paid in full using the proceeds from the sale of the home. Depending on the lender's loan terms, you could be charged prepayment penalty fees and other fees for paying off and closing the loan before the end of the contracted loan term.
Read on to learn more about what happens to a HELOC when you sell your house.
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What is a HELOC?
A
Home Equity Line of Credit (HELOC) is a type of “revolving” credit which has a credit limit, a variable interest rate, and which is secured by the equity in your home. Most HELOCs have a 10-year “draw period” during which the credit line can be used, followed by a repayment period when the unpaid balance must be paid back.
There are
HELOC pros and cons to consider. One HELOC advantage is that you can use the money as you need it, and you will only pay interest on the amount you use.
How a home sale works with an open HELOC
In a home sale where there's a first mortgage and an open HELOC (
second mortgage), the mortgage debt is always paid first from the proceeds from the sale.
If you have accepted an offer on your home and are preparing to sell with an open HELOC, be sure to contact both your HELOC lender and mortgage lender to let them know of the upcoming sale. Ask each lender, "can I sell my house if I have a HELOC?".
In addition, ask your HELOC lender if you will have to pay prepayment penalties or any other fees for paying off the loan (assuming the sale amount covers pay-off of both your mortgage and HELOC). If the sale of your home will not give you enough money to pay off the HELOC, you'll need to set up a payment plan with the lender.
Unless your HELOC lender specifies otherwise, your home sale will follow the usual process. You'll go to the closing where the homebuyer will provide your attorney or title company with a check for the purchase price that was the accepted offer.
There are several ways the funds to pay off your mortgage and HELOC can be disbursed, and the title company or your attorney (if you have hired one) can help with this.
If you are underwater on your mortgage, meaning you owe more on your mortgage than the home is worth, you will still need to pay off the remaining balance of your HELOC after the sale of your home.
Benefits of selling a home with a HELOC
Pay off the balance. Selling your home will relieve you of a monthly mortgage payment and HELOC payment, freeing up cash you can use to purchase your next home. If you're down-sizing, you'll have more options such as purchasing an apartment, condominium, or even a recreational vehicle.
Credit score boost. Whenever you make a major change to your credit history your credit score may drop slightly. However, once the loans are paid off your credit score will increase again.
Credit scores rise and fall frequently based on your credit, payments, and debt.
No interest payments. Interest can really add up over time. Paying off your HELOC balance means you'll save money by no longer paying interest on the outstanding balance.
What to watch out for when selling a home with a HELOC
Selling a home with a HELOC is as straight-forward as any other home sale. However, there are some potential conditions to be aware of:
You're underwater on your mortgage. If you owe more on your home than it is worth, this is referred to as being "underwater." Because the mortgage loan is the primary loan it will be paid off first at closing. Your HELOC (second mortgage) will be repaid with any funds that remain. If you are not able to sell your home for enough money to pay off your mortgage and your HELOC, you will owe the HELOC lender money after closing.
HELOC prepayment penalties. Lenders often charge a
prepayment penalty fee to customers who pay off and close a HELOC account before the end of the loan term.
You can't afford to purchase another home. If you sell your home with the intention of purchasing another, be sure to do the math before you sell. Home prices have increased recently, and you may find that after you pay off your mortgage and HELOC, there's not enough for a down payment on a new home. Consider getting a property appraisal to determine the market value of your property before you list it.
You're considering a short sell. Properties that are "underwater" are sometimes sold short. Selling short means selling the home for less than it is worth. If you need to short sell your home, you will use the proceeds of the sale to pay-off as much of your mortgage as possible. You will need to re-pay any remaining mortgage balance as well as repay the outstanding HELOC balance. Asking your lenders for a loan modification could get you lowered payments or more time to repay.
You still need your HELOC. If you need the HELOC money but also need to sell your home, you'll need to weigh the pros and cons based on your unique situation. Once you sell your home you could apply for another HELOC or a
personal loan.
FAQs
Is repaying your HELOC before selling a good idea?
The advantage to paying off a HELOC before you sell the home is that you may save money on interest payments simply by paying off the loan sooner.
Is a HELOC considered a second mortgage?
Yes, a HELOC is a type of
second mortgage.
Can you transfer a HELOC to another property?
No, you cannot transfer a HELOC, as it is a lien against the property. When you sell your home, the proceeds from the sale will be used to pay off the HELOC.
Does closing a HELOC hurt your credit?
- When it comes to HELOCs affecting your credit, closing a HELOC shouldn’t have a great impact on your credit score as long as you have paid off the outstanding principal amount and not defaulted on payments.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!