If you have a home equity loan or line of credit like many Canadian homeowners, you may be wondering whether you can still sell your house. The short answer to that question is: yes, you can. The bigger question is: should you?
What is a home equity loan?
A home equity loan or HELOC (home equity line of credit) lets you use your house as collateral to secure funds. You may have borrowed against your home equity for a one-time lump sum of money (a home equity loan) or for a revolving line of credit that works much like a credit card (a HELOC). Either way, home equity loans create a lien against your house just like your primary mortgage.
What is a lien?
A lien is a legal claim against an asset that’s used as collateral to support a debt. When that lien takes the form of a home equity loan, the lender can force you to sell your house if you don’t repay your debt or make your payments on time.
Your loan must also be repaid in full when you sell your home voluntarily.
But since a lien is typically paid out of the proceeds when an asset is sold, so long as your home is worth more than the amount you owe on it, you shouldn’t have any trouble repaying your home equity loan when you sell your house.
What to expect when selling a house with a home equity loan in place
If you have a home equity loan and decide to sell your house, you’ll use the money you get from the buyer to pay off both your primary mortgage (if you have one) and any remaining principal on your home equity loan.
Here’s how that usually works.
1. You’ll choose an experienced realtor.
Your realtor will recommend a selling price based on the fair market value of similar homes in your area. Once you’ve signed a listing agreement, they’ll begin finding potential buyers and advising you on which offers are likely to provide the best financial outcome.
2. You’ll review all offers carefully.
It’s important to review the expected cash proceeds from every offer thoroughly—especially since the sale of your house is likely to trigger additional costs like:
- Real estate commissions
- These usually range from 3% to 7% in Canada and are subject to GST or HST.
- Prepayment penalties
- These may apply if you’re paying out your first or second mortgage early.
- Mortgage discharge fees
- Yes, there are legal fees attached to removing a lender’s rights from your property.
- Property taxes
- You must pay your share of any taxes due on your house at the time of sale.
3. You’ll legally transfer ownership of your home.
Your notary or lawyer will make sure your old mortgage is properly discharged when you sell your house, and that any other payments you’re responsible for are taken care of. They’ll also give you a breakdown of where all the funds from the sale went—including any net proceeds they hand over to you.
When you sell your house and you have a home equity loan:
- Your lawyer or notary must pay off your primary mortgage first.
- Your home equity loan or HELOC will also need to be paid out and closed.
- After your financial obligations have been met, any remaining funds will go to you. If, however, you still owe your lender money, you will need to make up the difference.
In some cases, the price of your home will have dropped since you bought it. It’s also possible you’ll have other claims levied against your house in addition to your home equity loan (like CRA or property tax liens, for example).
If you determine that the amount owing on your home equity loan will exceed what’s left after completing the sale of your house, you must either find another way to repay those funds—or try to make alternate arrangements with your lender before signing a Contract of Purchase and Sale.
Should you sell with a home equity loan?
When you’re “equity-rich”, selling a house with a home equity loan attached isn’t likely to result in any lingering financial issues. If you’re “equity-poor” however, or you have what’s known as an underwater mortgage (one where you owe your lender more than your home is worth) you could run into problems.
Best-case outcomes for selling with a home equity loan:
- Enough equity to pay off all your financial debts—including your primary mortgage and home equity loan—with money left over for you
- A better credit score, thanks to meeting all your regular payments on time and paying out your home equity loan in full
- Elimination of interest amounts you would have continued paying on your outstanding loan or line of credit
Worst-case outcomes for selling with a home equity loan:
- Early payment fees that increase the cost of paying off your mortgage or home equity loan
- Lost access to a valuable line of credit when you pay out and close down your HELOC
- Insufficient proceeds from the sale to cover the amounts still owing on your primary mortgage or home equity loan, resulting in financial complications
Bottom Line
While a home equity loan or HELOC makes it easy to use the equity in your house to get a loan, you must be prepared to pay that loan off (along with your primary mortgage) when you sell your house. If you can’t sell your house for enough to cover the outstanding amount on your home equity loan, you’ll need to choose between making up the difference yourself, waiting until you’ve sufficiently reduced the amount of your loan, or postponing the sale of your house until its value increases.
Frequently asked questions about selling a house with a home equity loan
How can I figure out if I have enough equity in my house to cover my home equity loan?
Before deciding to sell your house, get in touch with the lender who manages your home equity loan and ask for a written breakdown of the total payment amount (principal and interest) still owing on your loan or line of credit (for a clearer picture, don’t forget to add the amounts owing on your primary mortgage and any other property liens).
Are there penalties for paying off my home equity loan early?
There are a number of ways to borrow against the equity in your home. If you opt for a HELOC, you can pay back the money you borrow at any time without a prepayment penalty. Other home equity loan vehicles, like second mortgages or mortgage refinancing, are often subject to prepayment penalties. You should check the terms in your loan contract or speak with your lender.
What can I do to come out ahead if I sell my house and have a home equity loan?
There are three main ways to increase the possibility of making a profit when you sell your house and have a home equity loan. You can try to boost the value of your home by making impactful upgrades, remodels, or renovations. You can reduce what you owe on your home equity loan faster by raising the amount or frequency of your payments (where terms allow). You can wait until home values in your area go up.
Written by:
Leanne Armstrong is a HubSpot-certified freelance content writer specializing in business, technology and finance. As a former entrepreneur with a background in accounting and social psychology, she writes for a wide range of globally recognized organizations. Her work has appeared in publications like Forbes, Huffington Post and CanadianSME Magazine.
