Buying a home, moving, and settling in is an exhausting—and expensive!—experience. If you don’t have the money to handle these large expenses, you can seek a home equity line of credit or a HELOC. You can use this for debt consolidation and lower the interest rates on a credit card, saving money in the long run.
While it might sound like a HELOC is a slam dunk for people who need to borrow credit, some guidelines might not make it the best solution. For example, you need to owe less than your home’s value, and you can only borrow up to 85%. Continue reading to learn more about the intricacies of a HELOC.
Can You Sell Your Home if You Have HELOC
Many people take out a HELOC to finance purchases and then decide to sell their homes. Since you’ve borrowed against that equity, you may wonder if that’s possible. While you can sell homes with a HELOC, it’s not as straightforward as other instances of selling a house from start to finish.
You don’t have to worry about the mortgage lender because the sale will pay off your mortgage balance. But you’ll have to meet with your HELOC lender to ensure paying off the balance early won’t lead to a higher interest rate.
Since you own your home and make monthly payments, you build equity. This amount of equity makes homeownership especially valuable compared to renting when you’re paying a landlord without investing anything in the property yourself. Your home equity is the difference between what you still owe to pay it off and the current market value.
If you could sell your home to cash home buyers in Texas for $200,000 and have a home loan for $100,000, then your home equity is $100,000. This amount usually doesn’t matter unless you want to sell your house and make a profit or, of course, if you want a home equity loan.
The bottom line is that you can sell your home if you have HELOC, but the process may differ. You might need to talk to your lender and let them know your plans. They may have penalties for repaying your loan too soon. You should check the real estate market to see if you’ll get enough from your home sale to pay back what you owe plus the HELOC.
What is HELOC
A HELOC is a loan you take out against your home value. Many lenders ask for something valuable as collateral, like property or a vehicle. With a home equity loan, you borrow against your home, so you can only take out a certain amount.
Using the previous example of having $100,000 home equity, you could take out loans up to $85,000 in a HELOC. However, you won’t get that amount right off the bat. You’ll still apply for the loan; lenders look at the home value, equity, and credit score. They want to loan you the money and feel confident they’ll get paid back.
Since you can get so much money from a HELOC, many people use them for home renovations, home improvement, for a second mortgage, or to consolidate debt. However, you can use the funds for any large purchase, like college tuition.
There are ways a HELOC can hurt you, though, because you’re borrowing against my home. If you default on the loan, you could lose your house. You must ensure you can make payments on a HELOC before starting the process.
Many HELOCs have variable interest rates, which fluctuate monthly, meaning your payments can increase unless you encounter lower interest rates. You can’t predict when or how much it will increase, so you might find the new payments impossible. Failing to make payments can impact your credit and put your home at risk.
What Happens When You Sell Your Home With a HELOC
You can sell a house with a HELOC because the lenders don’t care where you get the money, only that you can repay the loan. If you sell your house, you can use the profits to pay off the HELOC and anything else you owe, like liens.
There’s no need to pay off a HELOC before you list your house, which means you can sell a house fast in Marion without getting a personal loan from another source.
Complications of Selling With a HELOC
If you want to sell your house with a HELOC, ensure you’ll make enough money to repay the loan. For example, if you owe $100,000 on your house and still have a $25,000 balance on your HELOC, you must sell the house for over $125,000 to pay off the debt.
People who won’t make enough from a home sale may want to wait. You can wait for the housing market to improve and pay off your HELOC. Selling a house by owner is a way to decrease the additional costs, like hiring a real estate agent and paying a commission and closing costs.
You may want to negotiate with your lender if you don’t think you can pay off the HELOC from your home sale. They may prefer to close your account and accept less than you owe to finish the deal in a short sale.
Should You Wait to Pay Off Your HELOC Before Selling
It’s possible to pay off your HELOC before you sell the house if you don’t need the sale proceeds to make the payments. Most HELOC repayment periods span 10 or 20 years, so you may have too much time to pay it off before you need to sell your house and move.
If you have the money in your account or can get another loan to pay off the HELOC, you may want to repay it before selling. Be upfront with your lender about your purpose and tell them you need to sell the house. They can advise you if it’s better to repay the loan before listing the house or if you should use the profits from the sale price to pay off the loan.
You may also want to pay off the HELOC, if possible, so you can keep profits from your house. Most homeowners appreciate investing in their property because they know they’ll get that money back when they sell. They may need the funds to buy their next home. So you can work to pay off your HELOC before selling the home and keep the profits for what you need.
Selling a House With HELOC
Since you use your house as collateral on your HELOC, selling the house may change the terms of the loan. The lender knows they can come after your house if you don’t repay the loan. However, if you don’t own the home, they have nothing securing their investment. In that case, they may want the loan repaid immediately to ensure they get their money.
If you take this path, you’ll fill out a Truth in Lending Real Estate Integrated Disclosure (TRID) form for the escrow agent. You’ll specify where your house sale funds go, like toward paying off your primary mortgage loan and your HELOC. The document also shows your total profits or if you still owe money at closing.
Once you make those payments and finalize the sale, the lender will close your HELOC, and you won’t have any obligations to the loan or the home you sold. You don’t have to worry about refinancing or opening a new credit line to cash-out the HELOC because it’s paid off.
In most cases, this process is very straightforward, and you won’t face any obstacles. However, if the value of your home decreases, you might not make enough from the sale to make your mortgage payments and loan. If the lender doesn’t accept a short sale, you may have to take out a different loan to pay back the HELOC.
Some lenders may impose early repayment penalties. It seems strange that they don’t want their money back as soon as you can provide it, but a HELOC is a long-term loan. The lender knows you’ll pay a set amount back every month, and paying it back early can negatively impact how many interest payments they’ll collect from your loan.
Before listing your house, talk with your HELOC lender about your options. You may find it’s easier to pay off the house from the profits before closing to finish the deal. Your lender may agree to a short sale instead of keeping you in a home that’s losing value. This discussion will help you understand how to proceed with your home sale.
Final Thoughts on Selling a House With HELOC
You don’t have to feel stuck in your house because you have a HELOC. We buy houses in San Antonio and can give you a lump sum that gets you out of your loan and into your new home without the stress of a traditional real estate transaction. Make sure you know your lender’s policies and contact us to simplify the process of selling a house with a HELOC.