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If you’ve taken out a home equity loan (or home equity line of credit) against your home, you can still sell it. If you do so, you will need to pay back the remainder of your loan, and most people use the money generated from the property sale to do that.

Selling a house with a home equity loan attached is fairly common, and most such sales proceed without any difficulties. However, there are a couple of potential issues to watch out for – especially if your home has decreased in value, or if your lender imposes early repayment penalties on your home equity loan. In this article, we’ll explain how the process works, and how to avoid these issues.

  • You can sell a home even if you’ve taken out a home equity loan (or home equity line of credit). 
  • In such cases, you can use the money you receive for the sale to repay the home equity loan, and you won’t have to make any further payments.
  • There are several complications that can arise, however. If your home has lost value since you took out the loan, you might not receive enough in sale proceeds to repay the loan. Some lenders will regard the loan as repaid anyway, but in other cases you might have to find another source of funds. 
  • You may also have to pay early repayment penalties. Make sure you check with your home equity loan lender before deciding to sell, so you understand whether these issues will arise.

Selling a House With a Home Equity Loan

Home equity loans allow you to borrow money against the equity you own in your home. They generally have low interest rates and long repayment terms, and your house acts as collateral to secure the loan. Because of this, they are sometimes referred to as a second mortgage.

Home equity loans (and similar types of debt like home equity lines of credit) also act just like a regular mortgage during property sales. These loans are secured against the value of your home, and if you sell it this can no longer be the case – so the home equity loan will become due. In most cases, sellers pay off the balance of their home equity loan, along with the primary mortgage, using the money paid by the buyer (that is, the money you receive for your home). 

There is a formal process for completing these transactions. Just before you close the sale of your house, the escrow agent should provide you with a Truth in Lending Real Estate Integrated Disclosure (TRID) form. This form will show how the sale proceeds are going to be used. Some will likely go toward existing liens such as your primary mortgage, and if you have a home equity loan the repayment of this will also be there. It will also show your net proceeds, or the amount owed to you at the close of escrow.

Once these payments have been made, your home equity loan will automatically be closed – you won’t have to make any further payments, including interest payments.

Pros and Cons of Selling With a Home Equity Loan

In many cases, selling property that has a home equity loan attached shouldn’t create any issues. Typically, you will use the proceeds from the sale to pay off the home equity loan in full, alongside your regular mortgage. Paying off your home equity loan in this way will also reduce the interest payments you would otherwise make over the life of the loan, and may even improve your credit score.

There are some potential issues to be aware of, though. The most important of these can arise if your home has lost value since you took out your home equity loan. In some cases, this can mean that the sale proceeds aren’t enough to pay back the loan. Some lenders are flexible in cases like this, and will waive their claim to the whole amount of the loan. In some cases, however, you will have to find another source of money to repay the loan. 

A second complication can arise if your lender imposes early repayment penalties on your home equity loan. Because these loans are often designed to be long-term commitments, you have be liable to pay penalties if you pay it back early, whether you are selling your home or not.

In both cases, it’s important to contact your home equity loan lender before you complete the sale of your home – and ideally before you decide to sell it. This will help you to understand the costs of selling your home, and what will happen to your loan after you do so.

Can You Sell a House With a Home Equity Loan?

Yes. In most cases, the money you receive from selling your house will be used to repay your home equity loan, and so you will no longer have to make payments after the sale. 

What Happens if My Home Has Decreased in Value?

In this case, the proceeds from the sale might be less than the outstanding amount you owe on your home equity loan. Some lenders will forgive the difference, but in some cases you’ll have to find another source of funds. It’s important to understand if this applies to you before you buy your house, so make sure you check with your home equity loan lender before you sell.

Are There Fees for Selling a House With a Home Equity Loan?

Sometimes. Some home equity loans have early repayment penalties that will apply if you sell your house to pay off the loan. Make sure you contact your lender before you sell to check if this applies to your loan.

The Bottom Line

If you’ve taken out a home equity loan (or home equity line of credit), you can still sell your house. In this case, you can use the money you receive for the sale to repay the home equity loan, and you won’t have to make any further payments.

There are several complications that can arise, however. If your home has lost value since you took out the loan, you might not receive enough in sale proceeds to repay the loan. Some lenders will regard the loan as repaid anyway, but in other cases you might have to find another source of funds. You may also have to pay early repayment penalties. Make sure you check with your home equity loan lender before deciding to sell, so you understand whether these issues will arise.

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