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A home equity line of credit (HELOC) allows you to borrow against the equity in your property. A type of second mortgage, it offers an alternative to home equity loans and credit cards. While HELOCS come with significant risks—after all, you're leveraging your home as collateral—the funds can be used for anything from renovating to paying for education, or even consolidating high-interest debt.
Having a HELOC doesn't prevent you from selling your home, but there are a few scenarios where it might complicate or hold up the process. Here's what you need to know if you have a HELOC and are planning to put your home on the market.
What Happens When You Sell Your Home With a HELOC?
Typically, HELOCs have two phases: the draw period, when you can take money out up to your credit limit, and a repayment period, when you gradually repay the principal and interest balance.
For many homeowners, listing a property with a HELOC and completing the sale isn't a problem. If you sell your home before you've fully repaid your HELOC, you do still have to pay it back, just differently than you would if you remained the owner of the property.
Once the sale closes, the remaining balance on your HELOC will be paid directly out of the sale proceeds by your creditor, along with any outstanding debt from your mortgage. This usually doesn't create problems—unless you can't afford to pay off the HELOC balance with the sale proceeds.
Additionally, because the HELOC will be paid off all at once upon closing, borrowers who have early termination fees or prepayment penalties in their contracts may have to cough up additional money if they sell during that window.
What Are the Potential Complications of Selling With a HELOC?
While having a HELOC doesn't necessarily mean you'll have trouble selling your home, there are a few scenarios when it can create potential snafus:
- The home has depreciated. If you've built equity in your home and it's worth more than when you bought it, you shouldn't have an issue in this department. But if your home has lost value, and you're underwater on your mortgage, your mortgage and HELOC may be worth more than what you can make back from a sale. You might have to pay the difference out of pocket, or you may need to wait for the home value to appreciate or pay down more of the balance before selling.
- Your lender charges fees. Some lenders charge early termination fees or prepayment penalties if a borrower closes a HELOC account or pays off the balance in full far earlier than the original term. This is because the lender will no longer be earning their expected income from interest payments over time, so they levy a fee to counteract the early payoff. If your HELOC has an early repayment penalty or termination fee and you sell the house during that time, you may have to cough up some cash to pay those fees.
- You're over-extended. When you sell your house, your mortgage loan balance and your remaining HELOC balance will be subtracted from the sale price before you get a penny. If you owe a large HELOC balance, make sure you'll be able to sell your home for enough to pay both back and afford moving into your next place.
- You're losing necessary collateral. When you sell your home, you're no longer able to use that property as collateral. If you've come to rely on this line of credit as something to borrow against, it might be challenging to lose it.
- It complicates short sales. If you're short selling your home to avoid foreclosure and you have multiple liens on your property, you may not recoup enough from the property sale to be able to repay the HELOC balance. It's possible your HELOC lender will refuse to approve the short sale since there may be nothing left for them once your mortgage lender is paid. Instead of short-selling, you'll go through foreclosure, and the HELOC lien holder may sue you for a percentage of what you owe.
Should You Wait to Pay Off Your HELOC Before Selling?
Given that HELOC repayment periods are lengthy—often a decade or two—it may be unrealistic to completely pay off your HELOC before selling. That is, unless your balance is low or time is on your side.
Ultimately, your HELOC will be repaid. It's up to you, your budget and your situation whether it makes the most sense to pay off the entire HELOC before listing, or if you'd rather wait and sell with a HELOC and let the sale proceeds cover the remaining balance. If you will need all of the cash from your home's sale to pay off your mortgage and secure a new home, that could be a situation where it's better to pay off your HELOC before listing your home.
The Bottom Line
Taking out a HELOC can have major benefits for some homeowners: The flexible credit line can be drawn from again and again as needed, and borrowers only pay interest on what they use. Just keep in mind that these accounts also come with steep risks, ranging from hefty closing costs and early repayment or termination fees all the way up to losing your house if you can't repay the loan.
It's also important to remember that opening or closing any credit accounts, such as HELOCS and mortgages, impact your credit. If you've recently made any big moves, it's smart to check your credit report and credit score to see how they've been impacted.