Sell a House With a Mortgage on it
The typical home mortgage has a term length between 15 and 30 years. However, many homeowners wish to sell their homes before the end of the loan term. While some of these individuals have been making extra payments and may have already paid off their mortgage, many need to sell a house with a mortgage in place. Can you sell a house with a mortgage? What happens to your mortgage when you sell your house? The good news is that this is entirely possible, and it is much more common than you may think. A closer look reveals what happens when you sell a property that still has a mortgage in place.
Paying Off Your Outstanding Mortgage Balance
Your home mortgage is secured by your house, so the mortgage must be paid in full before the house can be conveyed to a new buyer. In many cases, the sales price is more than sufficient to pay off the outstanding mortgage balance. In fact, many sellers net a profit from the sale of their homes. However, if you owe more money on the home than it is worth, you will need to come to the closing table with cash to pay off the remaining balance. Keep in mind that some lenders have a prepayment penalty policy, which means that you may be charged a fee to pay off the loan balance early. It is important to check with your lender before you decide to pay off your mortgage balance early.
Requesting a Payoff Balance
You may assume that the remaining loan balance on your mortgage is the full amount owed, but this is not the case. Accrued interest must also be taken into account. In most cases, this interest accrues daily. The easiest way to learn how much you owe on your loan account is to request a payoff amount directly from the lender. Typically, a payoff amount will only be valid for 30 days or less, so you may need to request an updated payoff amount as the closing date approaches.
Understanding Home Equity
When you sell a house with a mortgage, the matter of equity will inevitably come into play. Equity is the difference between the value of the home and what you owe on all mortgages, including HELOCs and home equity loans. The easiest way to calculate equity is to look at the current value or sales price of your home. Subtract the payoff balance of all outstanding mortgages from the value or sales price. The result is your home equity. Positive equity means that you may receive cash back at closing. Negative equity means that you may need to come to the closing table with extra funds to pay off all mortgage balances.
Using Equity to Cover Closing Costs
You should be aware that the mortgage balances are not the only expenses that you are responsible for at closing. Sellers typically pay for a range of closing costs, including some title fees, taxes, real estate agent commissions and more. Depending on the situation, you may expect to pay approximately a percentage point or more of the sales price in closing costs. Because of this, you should not expect to receive all of your home equity as a profit at closing.
Dealing with Negative Equity
Negative equity occurs when you owe more money on your mortgage balances than the home is worth. Your mortgage must be paid in full before the house can be conveyed to another party. You have two options available when selling a house with negative equity. First, you can come to the closing table with the additional proceeds necessary to pay off the mortgages and to cover the closing costs. Second, you can consider a short sale.
A short sale typically occurs when the housing market conditions have worsened since the time of purchase and the house’s value has declined. When this happens, the lender may agree to accept less money than what you owe. This means that the lender will reduce the loan balance accordingly so that you do not need to come to the table with extra funds. Be aware that a short sale is a negative credit event. It can hurt your credit rating and make it more challenging for you to secure a mortgage in the future.
Buying and Selling a House at the Same Time
Many sellers plan to buy a new house at the same time they are selling their old house. Typically, these transactions do not occur simultaneously. Selling your old house first is the easier option. It enables you to transfer your home’s equity into cash before you buy your next house. In addition, it prevents the possibility of being strapped with two mortgages at the same time.
On the other hand, some people prefer to buy a new house before their old house sells. To do so, you must have enough cash on hand to make a down payment on the new house, and you must be financially prepared to pay two mortgages at the same time. There are a few strategies available for simplifying the process. One is to make an offer on a new home that is contingent on the sale of your old home. Another option is to apply for a short-term loan known as a bridge loan. The bridge loan’s funds can be used as the down payment, and this loan can then be paid in full with the equity of your old home when it sells. Taking out a home equity line of credit is another idea. This is a type of second loan on your old house, so the balance will be paid off at closing. A piggyback mortgage is also an option, and it is also known as an 80-10-10. This means that you will have an 80-percent first lien and a 10-percent HELOC second mortgage. You will also make a 10-percent down payment.
Selling a House with a HELOC
A home equity line of credit is essentially a second lien on a home, and it must be paid in full before the property can convey to a new buyer. When you sell a house with a mortgage, equity is first used to pay off the first mortgage. The remaining equity will be used to pay off the second mortgage or HELOC. If more funds remain, closing costs will be paid with the equity, and the additional funds will be paid to you as a profit.
Managing Escrow Account Funds When Selling a House
There are two types of escrow accounts to consider when you sell a house. The first is your mortgage lender’s escrow account, which holds funds for property taxes and insurance. You are responsible for property taxes and insurance up to the day of closing. Your escrow account will cover these expenses, and the excess will typically be returned to you within a few weeks after closing.
The second type of escrow account is established when you sell a house. It includes the buyer’s earnest money and other related fees from the transaction. Some funds in this account may be held for the buyer, and others may be held for the seller. The funds are settled at closing, so any balances owed are factored into the total balances owed or payable at closing.
When you sell a house with a mortgage, there are many factors to research and consider. Before you decide to sell your house, it is important to calculate your home’s equity and to ensure that the numbers make sense for your financial situation.