Wondering if you can sell your home with a home equity line of credit? It is still possible and common for homeowners. Selling your home with a HELOC to a cash buyer is one of your easiest options. Fill out our below form to receive your unique cash offer!
Can You Sell Your Home If You Have a HELOC?
If you are facing financial difficulty and need a large sum of money, one of your many options is to take out a home equity loan or home equity line of credit. However, many homeowners are afraid to borrow from their home equity, thinking they won't be able to sell the home if they do so. But is this true?
Selling your home if you have a HELOC or home equity loan is possible. In fact, it is very common. Most lenders don't care how you repay your loan as long as it gets paid on time, and one way to settle your HELOC is by using the proceeds from selling your home.
If you want to learn more about the home equity line of credit and how to sell your home if you have one, this blog is for you!
What Is Home Equity?
Home equity is the difference between your home's current market value and what you owe in your mortgage. If your property is worth $250,000 and you only owe $150,000 on a primary mortgage loan, that means you have $100,000 in home equity.
Your home equity increases over time through paying your current mortgage, making renovations, and property value appreciation. But your down payment also counts towards the equity of your home.
Homeowners typically access their home's equity when they decide to sell it, but you can actually borrow from it while still owning your home...
What Is a Home Equity Line of Credit (HELOC)?
A home equity loan or home equity line of credit (HELOC) allows you to borrow money from the equity of your property. This can be risky since your house will serve as the collateral for the loan you took out. It is crucial that you stay on top of the payments, so you don't lose your home.
Typically, when you apply for a home equity loan or a second mortgage, lenders will look at your home's market value, your credit score, and the amount of equity your property has.
If your house doesn't have sufficient equity or your credit looks bad, you won't be approved for a loan.
Meanwhile, if everything is great, you'll get access to a home equity line of credit (HELOC). Which means you will have a credit line with minimal interest and flexible repayment options.
Why Do Homeowners Take Out Home Equity Loans?
A home equity line of credit (HELOC) or second mortgage is, without a doubt, a great funding option if you plan to buy or pay for items or services that you can't otherwise pay with cash. That said, here are the most common reasons homeowners tap on their home equity.
- Debt Consolidation: Homeowners who want to avoid the high-interest payments of their unsecured debt (ex., car loans, personal debts, credit cards, etc.) borrow from their home's equity so they won't have to continue making monthly payments.
- Home Renovations: Home improvements increase the value of your home and can be used to market your house during the sale . Taking out a HELOC or second mortgage for it is quite a valid reason, but often only suggested if the value of your monthly mortgage is not that heavy on your bank account; otherwise, home equity lines can put you in financial distress.
- College and Continuing Education Costs: Paying for the college expenses of your child can also be shouldered by a HELOC. This is recommended if the interest rate of student loans is sky high while primary mortgage rates are lower. You can also use a HELOC loan if you plan to take courses for professional improvement or continue your master's degree.
- Emergencies: Home equity loans are also used by many to stay afloat when they lose a job or go through a medical emergency that stretches their funds too thin. Note, however, that this isn't for time-sensitive emergencies, as the process for applying for a HELOC loan can take about two to six weeks.
- Business Expenses: Instead of getting a business loan, you can take out home equity loans for much smaller interest payments. This is for businesses that need larger capital.
- Wedding Expenses: Weddings are expensive, so some couples who plan to get married take out home equity loans on a property they own separately to fund the occasion.
While a HELOC or second mortgage is a very convenient source of funds, it can be risky.
For instance, if you used the money for business capital and your business failed, you would have trouble paying for your loan. This means aside from losing your business, you may also lose your home.
Can You Sell Your Home If You Have a HELOC?
Yes. You can sell your house even if you have a HELOC or second mortgage. This is pretty common in today's housing market as many homeowners will pay everything off with the sales proceeds.
In fact, homeowners sell their homes to pay off their home equity loans. It works pretty much the same as selling the home to settle the primary mortgage balance and avoid foreclosure.
The proceeds of the home sale will cover the HELOC and if there's any amount left, it will then be pocketed by the homeowner.
Pros and Cons of Selling With a Home Equity Loan
Selling your property with a home equity loan is strategic if you want to pay off your first mortgage and your HELOC as well. Ideally, the home sale would give you enough funds to cover these mortgages and hopefully provide you with some money to save.
However, selling a home that has a HELOC can be problematic if your home's current market value depreciates over time.
In other words, your property becomes underwater and the sale proceeds can't really cover the primary mortgage and HELOC in full. If this happens, aside from selling your home, you have to find other ways to pay off your loan.
Another disadvantage of selling your house with an active HELOC on the real estate market is that you may be charged with prepayment penalties. Since home equity lines are designed as long-term commitments by lenders to gain interest, paying them early may be against the loan terms.
To avoid prepayment penalties and other issues, it is crucial to identify if your home has enough equity to settle your loans and ask your mortgage lender about the consequences of selling with an active HELOC.
What If You Don’t Have Enough Equity to Pay Off a HELOC?
If you plan to sell your house to pay your home equity loan or second mortgage, but the net proceeds won't really cover all your debt obligations, you might want to delay the sale until your home equity grows again. Alternatively, you can check out the options below.
Take Out a Personal Loan
Getting an unsecured personal loan to pay the remaining balance of your home equity loan or second mortgage is possible if you have a good credit score. Of course, it is best to compare interest rates and the set period of payment before settling on a lender.
Sell Personal Assets
If you have a car or any other asset you can let go of in exchange for cash, you could sell them to pay off your HELOC. In case you don't have anything to sell, you could borrow from your retirement account, although this is not typically recommended.
Negotiate With the Lender
If you realize that the sale proceeds can't pay your loan in full, talk to your lender right away. They may give you other options to pay or they can forgive the remaining balance through a short sale.
Loan Conversion to an Unsecured Line of Credit
If your HELOC or second mortgage balance is relatively low and you have a good credit score, you may ask the lender to convert your HELOC to an unsecured loan to avoid a short sale.
This means your HELOC would no longer be a loan secured by your house and you won't lose it in case you fail to pay interest as well as the loan principal. In exchange, you would have higher monthly payments and higher interest.
How To Sell Your Home With a Home Equity Loan
Selling your home when you have a HELOC or second mortgage is pretty much the same as any other home sale; however, you have to pay the loan during closing.
In other words, whether you are selling through the help of a real estate agent or a cash buyer, you won't get the home's sale proceeds in full when you close.
This also applies no matter what type of payment plan you are in (monthly payment or lump sum).
Usually, three days before the home sale closes, your escrow agent will give you a copy of the Truth in Lending Real Estate Integrated Disclosure (TRID) form.
This details the amount you have already paid on your current mortgage, equity loans, existing liens, etc., the payoff amount for these loans, and the amount you need to bring to the closing table if your property is underwater and you still owe money after the sale.
If, for instance, the offer you accepted is $800,000 and you owe $300,000 for the primary mortgage and $100,000 for the home equity loan, the escrow agent will pay these loans first. That leaves you with $400,000 minus the closing costs (and any agent fees). Of course, this is if your home is not underwater.
Sell Your Home With a HELOC to a Cash Buyer
When you need to sell your house fast but have an active home equity loan, you could opt to sell to a cash buyer. This will help you avoid listing your property on the local real estate market and avoid waiting weeks or months for buyers to take an interest in it.
Getting a cash offer means agreeing to a more flexible sale timeline. Since cash buyers remove lenders from the picture, the sale can close fast. You'll get the cash in your bank account as early as seven days.
Note, however, that when you sell to a cash buyer, the sale proceeds would still go to your home equity loan, existing mortgage loan, second mortgages, or existing liens if you have any (similar to a traditional sale).
Frequently Asked Questions
How Do I Pay Off a Home Equity Loan Faster?
To settle your home equity loan or second mortgage faster and avoid further payments, you have two major options— increase your monthly payments or explore other refinancing options.
Among the two, increasing monthly payments for second mortgages are more favored by many homeowners. This reduces the principal amount of your HELOC as well as its interest.
Note, however, that you should ask your lender if there is any prepayment penalty should you increase your monthly payments.
Are There Fees for Selling a House With a Home Equity Loan?
In some cases, you have to pay a prepayment penalty if you sell your house with a home equity loan or second mortgage. On top of this, you also have to pay for the closing costs and real estate agent commission should you decide to sell on the traditional real estate market.
What Happens If My Home's Value Depreciates?
When your home value is less than what you owe in your HELOC, your existing mortgages, and the money you owe to lien holders, you may ask the lender to forgive the balance through a short sale.
If you are not approved for a short sale, you may have to sell fast at a loss and cover the remaining balance if you don't want to face foreclosure.
Final Thoughts: Can You Sell Your Home If You Have a HELOC?
Selling a home with an active HELOC or second mortgage is not unusual. Ideally, there should be no issues with this. However, if your property is underwater, the sale proceeds won't cover your HELOC leaving you with a balance you have to pay with other funds.
To help you sell your house fast and pay off your HELOC, reach out to us at Sell My House Fast. We'll give you a no-obligation offer and cover closing costs with the goal of providing you a fair and hassle free home sale.
Fill out our form below or call us at (844) 207-0788 to start selling your house even if it has a HELOC.