Do I Have to Pay Off My HELOC When I Sell My House?  (Can You Sell Your House if You Have a Home Equity Loan?)

Selling your house with a HELOC might seem daunting at first, but with the right information, the process becomes much more manageable. The first thing to know is that selling a home with a HELOC is possible, but it involves some extra steps.

In this guide, you’ll learn how the sale process works with a HELOC, including how the proceeds are used to pay off your loan and what to watch out for regarding prepayment penalties and fees. 

By the end, you’ll have a clear understanding of how to manage your HELOC during the sale and ensure a smooth transaction. Let’s begin!

Can You Sell Your House If You Have a HELOC?

Yes, you can sell your house even if you have a HELOC. While it may not be as straightforward as a usual sale, selling with a HELOC is possible.

In fact, HELOCs are quite common among homeowners, with over 13 million active accounts in the United States as of 2023. Many of these homeowners successfully sell their properties despite having a HELOC.

Here’s how a typical sale of your house with a HELOC would look like:

1. Set the sale price and list your home: Decide on a price for your home. Considering its market value and how much you owe on your mortgage and HELOC. Then, put your house up for sale.
2. Accept an offer and start the selling process: Once you receive an offer that meets your expectations, agree to it and proceed with the sale.
3. Get the HELOC payoff amount: Contact your HELOC lender to find out how much you need to pay off. Make sure to ask about interest and fees too.
4. Close the sale and pay off debts: At closing, the proceeds from that sale will go to your current mortgage lender to pay off your mortgage and HELOC.
5. Clear the HELOC lien and transfer ownership: After paying off the HELOC, the lien is removed from your property. From here, you complete the closing paperwork to officially transfer the ownership to the buyer.

This simple overview shows how selling a house with a HELOC typically goes. In general, it’s similar to a regular sale but with a few additional steps.

What is a HELOC and How Does It Compare to a Home Equity Loan?

A Home Equity Line of Credit (HELOC) is a loan that allows you to borrow money against the equity you’ve built up in your home. Unlike a traditional mortgage or home equity loan, where you receive a lump sum, a HELOC provides you with a credit limit that you can draw from as needed.

To put it simply, think of a HELOC as a credit card tied to the value of your home. As you pay down your mortgage, you build up equity. This equity acts like a credit line—the more equity you have, the more you can borrow. 

A HELOC allows you to access this credit when you need it, similar to how you use credit cards for purchases. This makes HELOCs popular for things like home improvements, paying off debt, or covering large expenses. 

Impact of a HELOC on the Sale Process

Selling a home with a HELOC involves steps that can affect the overall sale process. This can influence the timing, paperwork, and final payout from the sale.

Here’s a quick look at how a HELOC affects the sale process:

1. There are extra steps in the sale process: You’ll need to get the exact payoff amount from your lender and ensure it’s settled during closing.
2. The HELOC reduces your profit: The amount you owe on your HELOC will be deducted from the money you receive from the sale, which means you’ll take home less profit.
3. Impact on your final payout: The remaining funds are yours if the sale proceeds are enough to cover the HELOC and any other mortgages. Otherwise, you’ll need to bring additional funds to make ends meet.

In short, a HELOC adds a few extra steps to the selling process and can impact how much profit you take home.

What Happens to Your HELOC When You Sell Your Home?

When you sell your home and the money from the sale comes in, they will pay off your outstanding HELOC balance and any prepayment penalties first. The sale proceeds are then used to clear any remaining mortgage balance. After these debts are paid, the remaining money is your profit.

It’s also important to check if there are any prepayment penalties or fees for paying off the HELOC early. These penalties can add to your costs, so it’s best to consider this along with other considerations.

Factors to Consider When Selling Your House with a HELOC

There’s a lot to consider when selling a house with a HELOC, from calculating and ensuring the sale proceeds are sufficient to understanding potential fees and the impact on your credit score. 

Here’s a brief look at the different considerations you need to keep in mind:

• Ensuring sale proceeds cover your HELOC and mortgage
• Checking for Prepayment Penalties when repaying your HELOC
• Understanding how repaying your HELOC affects your credit score
• Evaluating your home equity before selling
• Reviewing the TRID form details
• Strategically timing the payoff of your HELOC

Let’s dive into these factors to see how they might affect your sale.

Ensuring sale proceeds cover your HELOC and mortgage

When selling your home, one of the first things to check is whether the sale proceeds will be enough to cover both your HELOC and any remaining mortgage balance. 

The proceeds from that sale will go to your current mortgage lender to pay off these debts first. If the sale amount isn’t sufficient, you will need to bring additional funds to the closing to make up for the difference.

Checking for prepayment penalties when repaying your HELOC

Some HELOCs come with prepayment penalties, which are fees charged if you pay off the loan early. These penalties can be around 1% to 2% of the remaining balance, which can add up and increase your selling costs. 

Before you sell your house, check first with your lender to see if these penalties apply and how much they could be.

Understanding how repaying your HELOC affects your credit score

Paying off your HELOC can have both positive and negative effects on your credit score. On the positive side, reducing your overall debt by paying off the HELOC can improve your score. 

However, once the HELOC is fully paid off, the account will be closed. As a result, your score may slightly decrease because it reduces your available credit. This change might be minor, but it’s important to remember.

Evaluating your home equity before selling

Home equity is the difference between your home’s current market value and what you still owe on your HELOC and mortgage. If your equity is low, the money from the sale might not be enough to cover all your debts. 

Knowing your home equity helps you make informed decisions about how to price your home and manage any remaining debts.

Reviewing the TRID form details

The TRID form (TILA-RESPA Integrated Disclosure) is a key document that outlines all the costs involved in selling your home. 

It provides a clear breakdown of all the costs involved in the sale, including how the money from the sale will be used to pay off your HELOC, mortgage, and other real estate-related expenses.

Reviewing the TRIDD form carefully helps you avoid any surprises or mistakes during the closing process.

Strategically timing the payoff of your HELOC

Timing your HELOC payoff carefully can help you reduce or avoid prepayment penalties. A good time to do this is when the draw period ends because lenders are often more lenient with penalties at that point. 

If your HELOC requires large payments (balloon payments) at the end of the draw period, paying off the loan then can save you from paying more in interest. 

To decide, compare the prepayment penalty with the interest you’d pay if you kept the HELOC open. If the penalty is lower, paying it off early could save you money; if it’s higher, it might be better to keep the HELOC open to avoid extra costs.

Should You Repay Your HELOC Before Selling?

You can pay off your HELOC early but you don’t have to; it can be paid off with the proceeds from the sale. However, if you have money available to pay it, paying it off early can make the sale process smoother. 

Here are the pros of paying off your HELOC before selling:

• Simplifies the sale: By paying off the HELOC before listing your home, you eliminate the need to deal with this debt during the closing process. This can make the transaction more straightforward, as you won’t have to coordinate the payoff with the sale proceeds.
• Improves your credit score: Paying off the HELOC reduces your overall debt, which can have a positive impact on your credit score. A higher credit score can be beneficial if you plan to apply for a new mortgage or other credit in the near future.

On the other hand, here are the cons of paying off your HELOC before selling:

• Lose access to credit: Once the HELOC is paid off, you no longer have access to the line of credit it provided. If you were relying on that credit for future expenses, you’ll need to find another source of funds.
• Upfront cost: Paying off the HELOC before the sale requires a significant amount of money upfront. If you don’t have the cash on hand, this could be a financial burden.

In summary, whether to repay your HELOC before selling depends on your financial situation and needs. 

Steps to Take When Selling a House with a HELOC

Selling a house with a HELOC involves specific steps to ensure everything goes smoothly. Here’s a simple step-by-step process to follow:

1. Contact Your HELOC Lender: Start by reaching out to your HELOC lender. Ask for the exact payoff amount and inquire about any fees or prepayment penalties that may apply. This will help you understand what needs to be paid at closing.
2. Evaluate Your Home’s Equity: Calculate how much equity you have in your home by subtracting your remaining mortgage and HELOC balance from your home’s market value. This will give you a clear picture of whether the sale proceeds will cover your debts or not. 
3. Decide on a Sale Price: Based on your equity evaluation, set a sale price that will allow you to pay off the HELOC, cover any prepayment penalties, and if possible, leave you with some profit.
4. Prepare for Potential Complications: Be prepared for the possibility of a complicated sale process. This can happen if the sale proceeds don’t fully cover your HELOC and mortgage, or if you’re dealing with special situations like selling without a realtor or during a divorce. It’s also important to have a backup plan for sourcing additional funds if needed.
5. List Your Home and Accept an Offer: List your home on the market, and once you receive a suitable offer, accept it. Ensure that the offer price will cover all necessary expenses, including the HELOC payoff.
6. Coordinate with Your Lender at Closing: During the closing process, work closely with your lender to ensure the HELOC is paid off using the sale proceeds. Double-check that all debts tied to your home are cleared and that there are no other existing liens.
7. Complete the Sale and Finalize Paperwork: Once the HELOC is paid off and all other debts are settled, finalize the sale by completing all paperwork. This step will transfer ownership to the buyer and close out your HELOC account.

By following these steps and coordinating with your lender closely, you can simplify the process of selling a house with a HELOC to investor home buyers in Seattle and avoid unexpected issues.

Common Challenges When Selling with a HELOC

Selling your house with a HELOC can present some challenges. Knowing what to expect can help you prepare and avoid any surprises. 

Here are some common challenges when selling a home with a HELOC:

• Underwater Mortgages: If you owe more on your mortgage than your home is worth, the sale proceeds might not be enough to pay off your HELOC and other loans. In this case, consider negotiating with your lender or exploring a short sale to resolve the situation.
• Prepayment Penalties and Fees: Some HELOCs charge prepayment penalties or extra fees if you pay off the loan early, which can pose a challenge when selling. To minimize these costs, check your loan terms early, review relevant reports, and discuss options with your lender.
• Sale Proceeds Falling Short: If the sale proceeds don’t cover your HELOC balance, you might need to bring additional funds to closing, negotiate with your lender, or consider a short sale with the help of a qualified real estate agent.

By being aware of these potential issues and planning accordingly, you can help ensure a smooth sales process.

Key Takeaways: Navigating the Home Sale Process with a HELOC

Selling a home with a HELOC takes careful planning, but it’s definitely doable. During the sale process, it’s important to work closely with your lender, be aware of any potential fees, and prepare for possible challenges.

By staying informed and planning ahead, you can make the process smoother and successfully complete the sale. Although it may seem complicated at first, with the right approach, selling a home with a HELOC can be quick and easy. 

For expert assistance, especially when you need to sell your house as-is, visit the Kind House Buyers site or contact us at (253) 216-2497 to learn more about our services.

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Author: Keith Sant

Keith Sant is a real estate investor and entrepreneur who enjoys helping others by sharing useful real estate information. Keith’s goal is to educate home sellers so they can make the best decisions for their real estate problems. When Keith is not working, he enjoys cycling and traveling with his wife, Krixelle.

He has been featured on numerous new and real estate platforms, including Zillow, HomeLight, Better Homes & Gardens, Realtor.com, MSN, and Yahoo Finance.