Home equity loans and lines of credit (HELOCs) can put cash in your hands to fund home improvements, debt consolidation, or other financial goals. But if you have a HELOC, what happens if you sell your house?
The good news is that you won’t carry the debt with you. Balances owed to HELOCs are paid off using proceeds from the sale. (The same is true of selling a house with a home equity loan.) This is a requirement before the property can change hands.
Understanding HELOCs and Home Sales
Can I sell my house if I have a HELOC? Absolutely, though it’s important to understand how having a HELOC to repay affects the sale process and the amount of profit you get to walk away with.
Here’s a simple HELOC definition: A HELOC is a revolving line of credit secured by your home. When a home is sold, any debts attached to the property, including all mortgages, must be cleared so the new owner can take possession. That applies to your primary mortgage as well as any HELOCs or home equity loans you owe.
HELOCs and home equity loans are junior liens. A lien is a legal claim against a piece of property that protects a lender or creditor’s interest in it. Junior liens are subordinate to senior liens, which in the case of a home would be your primary mortgage — assuming you still have one. Liens, whether senior or junior, must be cleared before a piece of property can be sold.
In other words, you can’t take your HELOC with you. Once the HELOC is paid off after you sell, you won’t have access to your line of credit any longer.
Recommended: HELOC Loan Guide
Settlement of HELOC Upon Sale
HELOC debts must be settled when you sell the home; you can’t take your line of credit with you. Settlement means the debt is paid or cleared and is no longer attached to the property. Here’s what happens to a HELOC when you sell your house.
Paying Off the HELOC Balance
Who handles the repayment of a HELOC balance when a home is sold? Typically that responsibility falls to the title company. Title companies conduct title searches when a home is sold to ensure that there are no outstanding liens on the property. They also offer title insurance to buyers.
HELOC payoff happens during the closing process.
• The title company requests a payoff amount from the HELOC lender.
• Funds to buy the home are sent to an escrow account that’s controlled by the title company.
• The title company uses funds from the escrow account to pay off the HELOC lender, along with your primary home loan.
• All remaining funds are forwarded to the seller.
Can you pay off a HELOC prior to closing? Certainly, though you’d need to come up with the money to do so out-of-pocket. If you don’t have cash on hand to settle the debt, you’ll need to use the proceeds from the sale.
Once a HELOC is paid off, you can check state or county property records where you live to make sure the lien was released. Lien release means the debt is cleared from the home.
Closing the HELOC Account
After a HELOC is paid off, you’ll need to make sure the line of credit is closed, since this may not happen automatically. Your lender might require documentation to close your HELOC, including:
• Closing documents showing proof of sale
• Payment receipts from the title company showing the HELOC was paid off
• Authorization from you to close your credit line
In turn, you should get a statement in writing from your lender attesting to the HELOC’s closure. It’s also wise to follow up with a check of your credit reports to make sure your line of credit is listed as closed and paid in full or paid as agreed.
Impact on Sale Proceeds
Selling a house with a home equity loan or HELOC shrinks the amount of profit you get to keep. The share of proceeds you keep depends on how much you owe on the home, including the first mortgage and HELOC, and the sale price.
Deduction of HELOC Balance from Sale Proceeds
When a home is sold with a HELOC, it’s usually the title company that handles repayment of the debt. The upside is that you don’t have to worry about calculating how much you’ll need to pay to settle the HELOC or arrange for payment to be sent to the lender.
Instead, the money comes right off the top. So, for example, say you sell your home for $500,000. You owe $250,000 on your first mortgage and $50,000 to a HELOC. After you deduct $300,000 for the combined mortgage debt, you’d be left with $200,000.
Potential for Remaining Equity
Selling a home with a HELOC assumes that your home’s value has increased since you bought it. If your home value climbed substantially, it’s possible that you could still have a decent amount of equity in the home even if you sell it with a mortgage and a HELOC in place. You may find it helpful to calculate your total equity before making a move to sell a home with a HELOC. You just need to know what you owe on the home in combined mortgage debt and your home’s approximate value.
A home equity calculator can help with this step. You can then decide what you’d like to do with the proceeds from the sale, once your HELOC is paid off. For example, you might apply it as a down payment on the next home you buy.
When you’re ready to buy your next home, you can research what’s required for mortgage preapproval and shop around to find the best mortgage rates. Some options, like FHA loans, allow for a smaller down payment.
Considerations for Underwater HELOCs
Being underwater in a home means you owe more than it’s worth. So, what happens to a HELOC when you sell upside down? And can you sell in that scenario? The answer is yes, but being underwater can add a wrinkle to the process.
Insufficient Sale Proceeds to Cover HELOC
Your first mortgage takes priority for payoff when you sell a home. Any proceeds go to that loan first, before money is directed toward HELOC debt. If the sale proceeds aren’t enough to cover your first mortgage and HELOC, you end up in a negative equity scenario.
That means you’ll need to make up the difference in cash for the sale to go through. You may need to pull money from savings, liquidate some of your investments, or borrow from your retirement account to cover the gap. If you can’t or don’t want to do any of those things, you’ll have to look at other ways to deal with negative equity.
Options for Addressing Shortfalls
There are a few routes you might pursue to deal with a shortfall when selling a home with a HELOC. The possibilities include:
• Delay the sale. You might decide to push the sale back to allow your home’s value to rise or to pay down some of the HELOC balance. Whether that’s feasible for you can depend on your reasons for selling. A HELOC repayment calculator can help you see how you will progress if you start making steady payments to chip away at what you owe.
• Short sale. A short sale is an agreement between you and the lender to let you sell the house for less than what you owe. If you have a HELOC and a mortgage, both lenders would have to agree to a short sale.
• Pay off the HELOC with another loan. While not ideal, you might consider getting a personal loan or line of credit to pay off your HELOC. This only moves debt around; it doesn’t reduce what you owe. But it can clear the lien on the home associated with the HELOC so the sale can go through.
Prepayment Penalties and Fees
Before you move to pay off a HELOC, whether to sell your home or for any other reason, read the fine print. Specifically, it’s important to check for prepayment penalties and other fees the lender might impose.
Early Termination Fees
When you get a HELOC, it comes with a set repayment term. For example, you might have five years in which to access your credit line and then 15 years after that to pay back what you borrowed.
Lenders may impose an early termination fee or prepayment penalty if you pay a HELOC off early. These fees are designed to help the lender recoup some of the interest they won’t get to collect as a result of you paying off your HELOC ahead of schedule.
If you owe a prepayment penalty, that money will be deducted from the sale proceeds when your HELOC is paid off. Understanding when this fee applies, if your lender charges one, and how much you’ll pay can help you calculate your net profit from the sale.
Reviewing HELOC Terms
Ideally, you scrutinized the terms of your HELOC agreement before you ever signed on the dotted line. But if you didn’t read through it that closely, or you did but now you’ve forgotten what it says, it’s time for a thorough review.
• Go through your HELOC terms line by line to understand:
• How long the repayment term lasts
• If and when a prepayment penalty or early termination fee applies
• How the fee is calculated, if applicable
• When the fee is avoidable
• Any other fees you might pay to close out a HELOC early
If there’s something in your agreement you don’t understand, don’t hesitate to ask the lender for clarification. The home selling process is hectic enough, and the last thing you need is to be blindsided by surprise fees.
Recommended: What Is a Home Equity Loan?
Steps to Manage Your HELOC Before Selling
If you’re ready to sell your home, it’s important to include HELOC planning on your to-do list. There are two critical steps to tackle before you head to the closing table.
Obtaining a Payoff Statement
A payoff statement offers a detailed breakdown of how much you’ll need to pay to close out a HELOC, including the principal, interest, and fees. You can request a payoff statement from your HELOC lender, though keep in mind the numbers may change slightly as your closing date approaches.
You can use the amount on your payoff statement to estimate how much will be left from the sale proceeds after your first mortgage and HELOC debt are paid. If you have an online account that you use to manage your HELOC, you may be able to log in and request an accurate payoff amount. Otherwise, you’ll need to reach out to the lender directly.
Planning for Closing Costs
Both sellers and buyers have closing costs they’re responsible for paying. The amount you have to pay can depend on the details of the transaction and where you live. Typical seller closing costs can range from 8% to 10% of the home’s sale price.
These costs are most often paid from the sale proceeds. So you’ll need to factor that into your calculations when estimating your profit.
Going back to the previous example of a $500,000 home sale, your closing costs could add up to between $40,000 and $50,000. If you deduct that from your estimated $200,000 in profit, you’d actually walk away with $150,000 to $160,000 instead.
The Takeaway
Understanding what happens to a HELOC when you sell your house can help you navigate the process with as few headaches as possible. And if you own a home but haven’t tapped into your equity yet, knowing what to expect can help you understand whether the time is right for a HELOC based on when you might want to sell.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
Will I owe money if my home sells for less than the HELOC balance?
If you’re upside down on your home when you sell with a HELOC, you’ll have to make up the difference to pay the line of credit off. If you can’t do that, you may need to delay the sale, arrange a short sale with the lender, or get a personal loan to pay the HELOC in full.
Are there fees associated with closing a HELOC when selling my house?
HELOC lenders may charge early termination fees or prepayment penalties if you pay your line of credit off ahead of schedule. If you owe this fee, it’s deducted from the sale proceeds, along with the amount needed to pay off the HELOC.
How does selling my home affect my credit score if I have a HELOC?
A paid-off HELOC can help your credit score since it shows you can handle debt responsibly. That impact, however, may be counterbalanced by the effects of applying for a new mortgage loan if you’re buying another home.
Can I transfer my HELOC to a new property after selling?
HELOCs are secured by your home so if you’re selling, the line of credit doesn’t transfer with you. If you’re interested in getting another HELOC, you’ll have to apply for a new one once you buy another home.
What happens if I don’t pay off my HELOC before selling my house?
If you don’t pay your HELOC off yourself before selling, then the HELOC balance is deducted from your sale proceeds. The title company handles repayment of HELOC debt for you from your sale proceeds, then passes on the remaining funds from the sale to you at closing.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/Ridofranz
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