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Selling Your House Before Paying It Off

August 04, 2020
happy couple signing papers to sell a house

Finding the right home is rarely a permanent proposition. Most people aren’t staying in their first house until the end of their days; in fact, the average American moves over eleven times in their life, so while it’s romantic to imagine staying in one home and passing it on to future generations, the odds are overwhelming that you’ll be looking for your next place before too long.

Managing Your Mortgage When Selling Your Home

Mortgages don’t exactly account for the frequency of relocation we now see. Mortgages aren’t year-to-year propositions; if they were, you’d be renting. When you sign on the dotted line, you’re committing to at least fifteen, or more like thirty years, of monthly payments until you’ve paid off the balance. But that doesn’t mean that you can’t get out of your mortgage if you need or want to move out of your current place — just that you have to prepare to make good on the loan.

If you’re considering selling your home while you still have a mortgage on it, you should start by getting a mortgage payoff quote from your lender. The specific quote is only good for a month or less before additional interest accrues or your next payment is made, but it can serve as a benchmark for determining what you need to generate from a sale.

Sellers should be aware of the terms of their mortgage in regards to early or home sale payoffs and understand any additional costs incurred by selling before the end of the term. Some mortgages have stipulations that require borrowers to pay their mortgage in full upon the sale of the home, and some assess a prepayment fee on repayment ahead of schedule, the terms and amount of which would be outlined in the original loan documents you signed. There are also the closing costs to consider, which are substantial for you as the seller as well as for the buyers.

Your mortgage might not be the only debt tied to your home. Many homeowners take out a home equity line of credit (HELOC) against the equity they’ve built up in the home to pay for major expenses, and like the mortgage, a HELOC needs to be paid off before you can be free and clear of your current home. The mortgage itself takes priority in being repaid from the proceeds of the sale, but your HELOC needs to be paid in full as well. 

These debts and expenses should factor into your determination of the price you set for your home. In selling, you need to pay off what you owe on the house and pay for the closing costs, and hopefully, make enough profit off of the sale to finance the expenses of buying a new home.

Looking for a healthy return on the investment in your home can be a tricky proposition; though you have an amount in mind of what you want to make on the sale, the market might not bear that price. Potential sellers should do their research on comparable home sales before deciding to sell. If home values are such that you will not clear enough to pay off your mortgage totally, you can choose to wait for a more felicitous market.

It may be the case that you’re left with no choice but to sell. People with mortgages who fall behind on their payments run the risk of having their home repossessed in foreclosure, and may choose to attempt to sell if they can’t negotiate loan forbearance or other options with their lender. With any luck in a good market for sellers, a homeowner can get a price that allows them to pay off the mortgage balance and any penalties. But if the home’s value is less than what’s owed, they may be forced into a short sale to recoup what they can and negotiate for forgiveness on the remainder.

If you’re concerned about paying off your current mortgage, it might be advisable to sell your home before buying another. Trying to buy a new home ahead of selling your own might make for an easier transition between residences, but without a sale lined up you run the risk of carrying two mortgages for an indeterminate period. Even worse, those twin burdens could compel you to take the first decent offer on your home rather than the best one. If you’re choosing to sell, you should look to get the most you can out of it.     

Broadly speaking, lenders aren’t bothered by your decision to sell, so long as they get what they’re owed in the end. Your commitment to your home may be decades on paper, but in reality, is only as long as your current place suits your needs. But the decision to sell can’t be made on a whim; there is that mortgage to pay, and along with perhaps a HELOC, and that requires hopefully more than one buyer willing to pay what you think your home is worth. As with every home-selling decision, you should be judicious about when to sell, and for how much.

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