Can You Sell Your Home If You Have a HELOC in San Francisco Bay Area?
If you’re in a financial bind and need a sizable amount of cash, you can consider tapping into your home’s equity through either a home equity loan or a home equity line of credit (HELOC). However, many homeowners hesitate to do this, fearing they won’t be able to sell their homes afterward. But is this fear justified?
Selling your home while having a HELOC or home equity loan is entirely feasible and quite common. Most lenders are primarily concerned with timely repayment, and one option to settle your HELOC is by using the proceeds from selling your property.
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?
Equity in real estate refers to the difference between the current market value of your property and the outstanding balance on your mortgage. For instance, if your property is valued at $250,000 and your outstanding mortgage balance is $150,000, your equity stands at $100,000.
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.
Typically, homeowners tap into their property’s equity when they sell it. However, you can also leverage this equity to borrow funds while retaining ownership of your property.
What Is a Home Equity Line of Credit (HELOC)?
A home equity loan or a home equity line of credit (HELOC) lets you borrow money based on the value of your property. This can be risky because your house is the security for the loan. It’s important to keep up with payments so you don’t lose your home.
Usually, when you ask for a home equity loan or a second mortgage, lenders check your home’s value, your credit score, and how much equity you have in your property.
If your house doesn’t have enough equity or your credit score is low, you won’t get approved for a loan.
But if everything looks good, you’ll get a HELOC, giving you a credit line with low-interest rates and flexible repayment options.
Why Do Homeowners Take Out Home Equity Loans?
A HELOC or second mortgage is definitely a top choice for funding when you’re looking to purchase or cover expenses that can’t be paid with cash upfront. Here are the main reasons homeowners use 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?
Absolutely. You can put your house on the market even if you have a HELOC or second mortgage. This is quite typical in today’s real estate market as numerous homeowners will use the sales earnings to clear their debts.
In reality, homeowners sell their houses to clear their home equity loans. The process is essentially the same as selling the house to settle the main mortgage balance and steer clear of foreclosure.
The earnings from the property sale will take care of the HELOC, and if there’s any remaining, it will be kept by the homeowner.
Pros and Cons of Selling With a Home Equity Loan
Selling your house with a home equity loan is a savvy move if you aim to clear your initial mortgage and HELOC debts. Ideally, the sale should yield ample funds to cover these debts and possibly leave you with extra cash.
However, selling a house encumbered by a HELOC can pose challenges if its market value depreciates over time. In essence, your property goes “underwater,” and the sale proceeds may not suffice to clear the primary mortgage and HELOC completely. In such a scenario, besides selling your house, you must seek alternative means to settle your loan.
Another drawback of selling a house with an active HELOC in the real estate market is the potential for prepayment penalties. Since HELOCs are structured as long-term commitments to generate interest for lenders, early repayment might violate the loan terms.
To sidestep prepayment penalties and potential complications, it’s vital to assess your property’s equity adequacy for loan settlement and inquire with your mortgage lender about the ramifications of selling with an active HELOC.
What If You Don’t Have Enough Equity to Pay Off a HELOC?
If you’re looking to sell your house to settle your home equity loan or second mortgage, but the final profit won’t fully cover your debts, you may consider postponing the sale until your home equity increases. Otherwise, explore the alternatives listed 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 own property or any valuable asset you can exchange for money, you could sell it to cover your Home Equity Line of Credit (HELOC). If you don’t possess anything to sell, you could consider taking a loan from your retirement fund, though this is generally advised against.
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 home equity line of credit (HELOC) or second mortgage balance is low and your credit score is strong, you could request the lender to change your HELOC into an unsecured loan to prevent a short sale.
This would make your HELOC no longer tied to your property, reducing the risk of losing your home if you’re unable to make interest or principal payments. However, in return, you’d face increased monthly payments and higher interest rates.
How To Sell Your Home With a Home Equity Loan
When you sell your home with a HELOC or second mortgage, it’s like any other sale, but you must settle the loan at closing.
In simple terms, whether you sell with a real estate agent or to a cash buyer, you won’t receive the full sale amount at closing.
This applies regardless of your payment plan (monthly or lump sum).
Typically, three days before closing, your escrow agent will provide a Truth in Lending Real Estate Integrated Disclosure (TRID) form.
This outlines your payments on your current mortgage, equity loans, and liens, the payoff for these loans, and any remaining amount due if you still owe after the sale.
For example, if your accepted offer is $800,000 and you owe $300,000 on the primary mortgage and $100,000 on the equity loan, the escrow agent will pay these first. You’re left with $400,000 minus closing costs and agent fees if your home isn’t underwater.
Sell Your Home With a HELOC to a Cash Buyer
When you need to sell your house fast, despite having an active home equity loan, you can choose to sell to a cash buyer. This saves you from putting your house on the local real estate market and waiting for weeks or months for potential buyers to show interest.
Opting for a cash offer means agreeing to a more adaptable sales timeline. Since cash buyers eliminate the involvement of lenders, the transaction can close quickly. You’ll receive the cash in your bank account within as little as seven days.
Keep in mind, though, that when you sell to a cash buyer, the proceeds will still need to cover your home equity loan, current mortgage, second mortgages, or any existing liens you may have (similar to a traditional sale).
Frequently Asked Questions
How Do I Pay Off a Home Equity Loan Faster?
To pay off your home equity loan or second mortgage more quickly and avoid extra costs, you have two main choices—boost your monthly payments or look into refinancing.
Of these, bumping up monthly payments for second mortgages is preferred by lots of homeowners. This lowers the principal amount of your HELOC and its interest.
Keep in mind, though, that you should check with your lender about any fees for paying off early if 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?
If your property’s appraisal comes in lower than the total of your HELOC, primary mortgages, and liens, you can request the lender to absolve the remaining debt via a short sale. If a short sale isn’t granted, you may need to sell quickly at a deficit and settle the outstanding amount to avoid foreclosure.
Final Thoughts:
Can You Sell Your Home If You Have a HELOC in San Francisco Bay Area?
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 We Buy Houses in San Francisco Bay Area. 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 (408) 557-7554 to start selling your house even if it has a HELOC.
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Author: Saini
My name is Saini, and I founded the We Buy Houses in San Francisco Bay Area team with years of experience in the real estate industry. I have assisted numerous sellers in selling their homes quickly, “AS-IS”, and for a fair price.
He’s been featured in multiple publications including Yahoo Finance, GoBankingRates, LegalZoom, The Mortgage Report, Apartment Therapy, US News and World Report, and SuperMoney among others.