What Happens To My Home Equity Loan If I Sell My House

When you sell your house, your home equity plays a key role in determining how much money you'll walk away with. Understanding how equity and home equity loans work during the sale is crucial, as it helps you plan for things like upgrading, downsizing, or reinvesting your proceeds. Knowing how to calculate and manage your equity ensures you make the best financial decisions.

Understanding Home Equity

Let’s go over the definition of home equity, along with a few details about how it works.

What Is Home Equity?

Home equity is the portion of your home that you truly own. For example, if you paid for your home in full with cash or have paid off your mortgage, you own 100% of your home’s equity. However, if you still owe money on your mortgage, your equity is calculated by subtracting your remaining mortgage balance from your home’s current market value. For instance, if your home is worth $300,000 and you owe $150,000 on your mortgage, your home equity would be $150,000.

A home equity loan lets you borrow money by using the equity you've built in your home as collateral. Similar to the primary mortgage you used to purchase your home, your property serves as security for the lender, protecting them in case you default on the loan. Often referred to as a second mortgage, a home equity loan adds an additional payment alongside your primary mortgage.

How Home Equity Loans Work

Home equity loans provide borrowers with a lump sum of money that is repaid in fixed monthly installments over a set period. These loans typically come with a fixed interest rate, meaning your rate and monthly payments remain consistent throughout the term.

Receiving Funds from a Home Equity Loan

With a home equity loan, you receive the entire loan amount in a single payment after the loan closes. Before accepting the funds, it’s essential to budget carefully. Lenders may approve you for more than you need, so make sure to borrow only what you can comfortably repay each month.

Repaying a Home Equity Loan

Once you’ve received your loan, repayment begins with fixed monthly payments that cover both the principal and interest. While a shorter loan term, like 10 years, can help you pay off the loan faster, it also means higher monthly payments compared to a 15- or 30-year term. Choose a term that balances your repayment goals with your budget. For example, Rocket Mortgage® offers home equity loans with terms of 10, 15, 20, and 30 years, giving borrowers flexibility to choose the right fit.

Can You Sell Your Home After Getting A Home Equity Loan?

Yes, you can sell your home even if you have a home equity loan. However, you'll need to fully repay both your home equity loan and the remaining balance on your primary mortgage. Many homeowners use profits from the sale of the house unless they have cash to settle it beforehand. When you sell your home, you'll need to fully repay both your home equity loan and the remaining balance on your primary mortgage.

Selling A House With A Home Equity Loan

There’s a process for selling a house with a home equity loan. We’ll shed some light on how it’s done.

Steps To Take Before Selling

Since home equity loan repayment periods can stretch over a decade or more, paying it off entirely before selling your home might not be realistic, unless your balance is low or you have plenty of time to plan.

How you approach home equity loan repayment depends on your budget and circumstances. You might decide to pay it off before listing your home, especially if you’ll need the sale proceeds to cover your mortgage and fund your next purchase. On the other hand, you could let the sale proceeds take care of the remaining balance when you close. It all comes down to what works best for your financial situation.

Before selling your home, find a real estate agent to determine your home's value and create a selling plan. They’ll estimate your home’s worth in the current market, helping you gauge whether you’ll come out ahead at closing.

Look for an agent experienced with home equity loans. They can help you confirm if the sale will be profitable and provide rough estimates of closing costs to calculate your potential proceeds.

Review Loan Agreements

Review your home equity loan terms to identify any potential difficulties to pay it off, such as prepayment penalties that could result in extra fees for early repayment. Be sure to check your primary mortgage terms as well, as some lenders may also charge prepayment fees.

While these costs shouldn’t stop you from selling your home, they should be included in your closing cost calculations. Understanding these costs upfront will help you avoid unexpected surprises at closing and ensure you’re financially prepared to cover all the expenses involved in selling your home.

If you’re unsure about the details, reach out to your home equity loan lender for clarification and to confirm the possibility of selling your home.

Determine Payoff Amounts

The most important thing to ask your lender is the payoff amount — that’s what it’ll take to clear the lien on your property. You should also check your mortgage balance, since that will directly impact how much you make from the sale.

Don’t worry about doing the math on your own, because your real estate agent can handle the calculations. But having a good idea of these two key numbers (your mortgage payoff and home equity loan balance) can give you a ballpark estimate of potential profits or losses.

Manage Sale Proceeds

Typically, the title company handling your sale will use the proceeds to settle any outstanding costs or fees. This includes paying off your home equity loan balance, any prepayment penalties, your mortgage loan, and related fees.

After covering these expenses, the title company will send you your net proceeds. They’ll also provide closing documents detailing the breakdown of your costs and the final amount you’ll receive from the sale.

Potential Complications In Selling

Though selling a house while you have a home equity loan can be a simple process, there can also be some challenging steps along the way. We’ll walk you through them to make you aware and help them seem less intimidating. Here’s what to look out for and how to handle it.

Property Depreciation

If your home's value has increased since you bought it, you likely won’t face any issues here. However, if your home has lost value, your combined mortgage and home equity loan balances could exceed the sale price. In that case, you might need to cover the difference out of pocket, wait for the home's value to increase, or pay down more of the balance before selling.

Lender Fees

A home equity loan comes with more than just the loan balance to consider. Application fees and other charges can add to the cost, and interest payments can extend your repayment timeline. This might delay the point where selling your home feels like a financially confident decision.

Risk Of Being Underwater

When you sell your house, the proceeds go toward paying off your primary mortgage first. Any remaining funds are then used to pay off your home equity loan and other debts tied to the property.

But what happens if the sale price doesn’t cover all these debts, leaving you with negative equity, also known as being underwater or upside down on your mortgage? Instead of receiving proceeds for the sale of the house, you’d be responsible for covering the difference.

If paying off the loan in full before selling isn’t possible, consider continuing regular payments and putting any extra funds toward the principal. This strategy can help reduce your balance and improve your financial position, making it easier to sell without being underwater.

Strategies For Increasing Home Equity

Can you increase your home equity? The short answer is yes! Here are a few ways to increase equity in your home.

Home Renovations To Boost Equity

Home improvement projects not only boost your home’s value, they also help you sell for a higher price or borrow more equity down the line. Consider improvements that enhance both quality of life and offer a solid return on investment. For instance, installing a new front door can increase security and see around 80% of return on investment.

Additionally, if you use the funds from a home equity loan to buy, build, or significantly improve the property, the interest payments may be tax-deductible. 

Maintain Property Value

Regular maintenance helps protect and increase the value of your home, which boosts its equity. Addressing small issues as they arise can prevent them from becoming bigger, more costly problems. For example, a cracked foundation or a leaky roof can quickly escalate into a major headache. By keeping your property in good condition, you not only ensure it functions well while you're living in it, but you also make it more attractive to potential buyers when it's time to sell.

The Bottom Line

If you sell your house with a home equity loan, the money from the sale will first go to pay off your primary mortgage and then any remaining balance will be used to pay off your home equity loan. If the sale price doesn’t cover both, you may need to pay the difference. Make sure to check your loan terms and work with your lender and real estate agent to avoid any surprises during the sale.