Can I Sell My House If I Have a HELOC?
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Richard Haddad Executive EditorClose
Richard Haddad Executive EditorRichard Haddad is the executive editor of HomeLight.com. He works with an experienced content team that oversees the company’s blog featuring in-depth articles about the home buying and selling process, homeownership news, home care and design tips, and related real estate trends. Previously, he served as an editor and content producer for World Company, Gannett, and Western News & Info, where he also served as news director and director of internet operations.
As homeowners across the country take advantage of rising property values, home equity lending is at a 16-year high. When it’s time to make a move, a common question is: Can I sell my house if I have a HELOC?
The good news is that selling a house with an open home equity line of credit is possible, but there are some factors to consider and pitfalls to avoid.
In this guide, we’ll walk you through what happens to your HELOC when you sell your home and provide real-world examples to help you understand the process.
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Can I sell my house if I have a HELOC?
Yes, you can sell your house even if you have a HELOC. When you sell, your HELOC is treated as a lien, similar to your mortgage. This means that both your mortgage and the HELOC (a second mortgage) will need to be settled at closing using the proceeds from the sale. The funds will first go toward paying off your primary mortgage, and any remaining balance will address the HELOC.
Selling with a HELOC requires an understanding of how it impacts your closing, but you can still go forward with your plans to sell. Next, let’s take a look at exactly what happens to your HELOC during the sale process.
What happens to my HELOC when I sell my house?
When you sell your house, any outstanding balance on your HELOC must be paid off at closing. The title company or closing agent will handle this payoff by using the proceeds from the sale to clear the HELOC balance, effectively closing out the account.
However, if there isn’t enough equity from the sale to cover the HELOC in full, you’ll need to bring additional funds to the closing table to cover the difference. Additionally, because your HELOC will be paid off all at once, you might face early termination fees or prepayment penalties, depending on the terms of your line of credit.
Let’s look at an example to illustrate how selling with a HELOC might work.
Example 1: Selling a house with a HELOC
Let’s consider an example scenario using a $420,000 home in which the sale proceeds are sufficient to cover both your mortgage balance and your HELOC debt.
- Your home’s selling price: $420,000.
- Your remaining mortgage balance: $200,000
- Your HELOC balance: $60,000
When the house sells, the $420,000 proceeds go toward paying off the $200,000 mortgage first. This leaves $220,000. The next step is to pay off the HELOC, which would deduct an additional $60,000, leaving you with $160,000 in proceeds after these equity-backed debts are settled.
Of course, you would also need to pay any required closing costs and agent commissions attached to the home sale.
Example 2: Selling a house with a HELOC
Now, let’s consider a scenario where the debt exceeds the property’s sale value. Suppose your home has some unrepaired damage and only sells for $375,000, and you have higher mortgage and HELOC balances.
- Your home’s selling price: $375,000
- Your mortgage balance: $300,000
- Your HELOC balance: $80,000
In this case, the $375,000 proceeds would cover the $300,000 mortgage, leaving $75,000. However, since the HELOC balance is $80,000, there would be a shortfall, requiring you to bring $5,000 to closing to satisfy both debts — along with any additional funds needed to cover closing costs.
Pitfalls to avoid when selling a house with a HELOC
Selling a home with an open HELOC is not only possible, it can be part of the normal closing process. However, you need to be aware of your home’s value, equity, and the terms of your HELOC agreement with your lender. Here are some potential pitfalls to watch for, along with tips to avoid or plan for them:
Being underwater on your mortgage
If your home’s market value is less than the combined amount of your mortgage and HELOC, you’re considered “underwater.” In this situation, the sale proceeds may not fully cover both debts, potentially requiring you to bring funds to the closing table, as in our second example above. Before listing, work with a real estate agent to assess your home’s value, and confirm that it covers both balances to avoid surprises.
HELOC prepayment penalties
Some HELOCs come with prepayment penalties if you pay off the balance earlier than expected. These fees vary by lender, so check your loan terms or speak with your lender to clarify. If a penalty applies, factor it into your closing costs, and consider whether it might be more financially advantageous to sell with the HELOC or pay it off first.
Too much reliance on HELOC money
If you’ve drawn extensively from your HELOC, it may affect your financial flexibility when selling. Using HELOC funds for home improvements or personal expenses can increase your debt, reducing net proceeds after the sale. Consider limiting additional draws from your HELOC if you’re planning to sell soon to keep your debt-to-equity balance in check.
Having enough for a new down payment
According to data from the National Association of Realtors (NAR), around 53% of repeat homebuyers use proceeds from the sale of their previous residence as a down payment for their next home purchase. With a HELOC on your current property, your net proceeds might be lower than expected. Before selling, review how much cash you’ll need to bridge the gap to your next home purchase, and consult with a financial advisor if needed to plan your next steps.
Complications with a short sale
If you have multiple liens on your property and decide you need to short-sell your house to avoid foreclosure, your lender may refuse to approve the short sale. This is because there may not be enough equity left over after your mortgage lender has been paid. You may be forced into foreclosure and face legal action from the HELOC lien holder as they attempt to collect what you owe. Speak with your lender early if a short sale may be needed so you understand the requirements.
Should I pay off my HELOC before selling?
Whether you should pay off your HELOC before selling depends on your financial situation and goals. Paying off the HELOC in advance can simplify the sale, leaving only your mortgage to be addressed at closing. It may also save you from potential prepayment penalties or reduce your overall debt burden.
However, if paying off the HELOC upfront isn’t feasible, you can still sell with an active HELOC as long as the sale covers both your mortgage and HELOC balance. Reviewing your home’s value and understanding your equity position can help you decide if paying it off beforehand is necessary. Working with a financial advisor or real estate agent can offer additional guidance on the best choice for your situation.
Know your home’s value before selling a house with a HELOC
Understanding your home’s current value is essential if you’re selling with a HELOC. Knowing where you stand can help you predict whether the sale will cover your outstanding debts and give you an idea of what net proceeds you might walk away with.
To get a preliminary picture, use HomeLight’s Home Value Estimator. This free tool provides a ballpark estimate of your home’s worth based on recent market trends and local sales data.
Consult With an Experienced Agent in Your Market
HomeLight’s free Agent Match tool can connect you with a top-performing agent to help you make the best decisions about selling a house you have inherited. We analyze over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.
FAQs on selling a house with a HELOC
When do I stop HELOC payments when selling my house?
You should continue making payments until the sale is finalized and your HELOC and mortgage are officially paid off at closing. Missing payments before the sale closes could result in penalties or damage to your credit score.
Can I transfer my HELOC to another property?
HELOCs are tied to a specific property and cannot be transferred directly. However, you may be able to close the existing HELOC and open a new one on another property if the lender approves. Speak with your lender to discuss options if a transfer is needed.
Does closing a HELOC account hurt my credit?
Closing a HELOC may have a minor impact on your credit, as it reduces your available credit and may affect your credit utilization ratio. However, the impact is usually temporary, and managing other accounts responsibly can help offset any dip in your score.
Can I apply for a HELOC while selling my house?
Applying for a new HELOC while selling can complicate things, as lenders may view it as a red flag. Additionally, HELOC approval often requires appraising the home, which can delay your sale. Most sellers find it best to avoid applying for new HELOCs (or any new lines of credit) if they’re planning to sell soon.
Hire a top agent to sell your house with a HELOC
Navigating a home sale with an active HELOC can be smoother with the right agent by your side. A top real estate agent can help you assess your home’s value, work through closing logistics, and maximize your sale proceeds.
Get matched with experienced agents who know your local market and have a track record of successful sales with HomeLight’s Agent Match platform. Partnering with a knowledgeable agent can make all the difference in achieving a seamless sale.
Header Image Source: (Jeremy Alford/ Pexels)
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