If you have a second mortgage on your house and you’re thinking of selling, you probably have some concerns. After all, it can feel daunting to sell your house before it’s paid off.
However, it’s actually quite common to sell your home before it’s paid off. According to FreddieMac, 90 percent of homeowners take out a 30 year loan. Yet, the average owner only keeps their house for 10.5 years. That means most homeowners hang on to their home for just over a third of the span of their loan.
So, selling your house with one mortgage still in repayment is the norm.
What if you took out a second mortgage? Don’t worry. Taking out a second mortgage is also pretty common, and it can be a smart move if you want to secure money for a remodel, buy a new home, or access extra cash at a relatively low rate.
So, can you sell your house with a home equity loan or second mortgage? The short answer is: “yes.” Whether you have a home equity loan or another type of second mortgage, it shouldn’t stop you from selling your house.
Still, if you’re worried about triggering penalties, having low equity, potential housing crashes, or being stuck with a post-sale bill you can’t afford, read on. We’ve pinned down advice from top real estate experts that show you how to sell a house with a second mortgage.
What is a second mortgage?
A second mortgage is a loan secured against a property that already has a mortgage. Some homeowners take out a second mortgage to help with a down payment, while others use a second mortgage to tap into their home’s equity.
Home equity is the portion of your home you own, while your lender owns the portion of the home you haven’t paid off yet. With the average home equity amount hovering around $150,000, this source of cash can go a long way towards a new home, investing in upgrades to your current home, or other ventures.
What’s more, a second mortgage’s interest rate is usually lower than a credit card, making it a relatively inexpensive way to borrow money. Just know that when you tap into your home equity, you put your house up as collateral. That means your lender can repossess your house if you stop making payments.
Home equity loans vs. HELOC
There are two main types of equity-based second mortgages: home equity loans and home equity lines of credit (HELOCs).
Home equity loans
A home equity loan is a type of second mortgage that taps into your home’s equity with a one-time lump sum. You pay the loan back in monthly installments with interest, just like your original mortgage.
Home equity line of credit (HELOC)
A home equity line of credit (HELOC) is also a second mortgage, but your lender won’t give you a lump sum of money. Instead, your lender approves you for a revolving line of credit and you withdraw what you need when you need it. It’s similar to a credit card, where you receive a credit limit that you can’t go over and pay interest only on the funds you use.
6 steps to selling your house with a second mortgage
Selling your house with a second mortgage is definitely doable, as long as you follow a few best practices. Here are five steps to take before you sell with a second mortgage:
1. Double check the value of your house
If you have a home equity loan or other second mortgage, it’s important to make sure your home’s sale price covers the remaining balance of both of your mortgages. This will protect you from being stuck with an unexpected bill once the sale is final. To prepare for a sale, you’ll need to calculate the following:
- The value of your home
- The totals still owed on each mortgage
- How much money you’d have left after paying off both mortgages
- How much it will cost to sell your home
Most real estate agents use a seller’s net sheet to help calculate these results. It’s one good reason to hire a top real estate agent who has whipped up hundreds of these documents before, especially if you face a more complicated financial situation.
Renee Kolar, a real estate agent with 33 years of real estate experience, provides every seller with a net sheet, which shows what the owner owes on the following:
- Each mortgage
- Property taxes
- Closing costs
- Any commissions
Kolar says she tries to make sure that every client she works with has a net sheet that’s accurate to within $100 or so at closing.
Want to gauge the net proceeds on your own? Here’s how you do it:
- Figure out how much your house is worth. HomeLight’s Home Value Estimator is a great starting point for gauging your home’s worth. It gathers data and property information from multiple sources to provide you with a real-time estimate.To confirm results, you can also grab a comparative market analysis (CMA) from a local agent or obtain a professional appraisal to lock down your home’s value.
- Deduct selling expenses and the outstanding debt of both mortgages. Take the sales price of your home and subtract any and all liens on the property and total selling costs, which may include closing costs, transfer taxes, real estate commissions, and any credits you are giving to the buyer.
Pro tip: When in doubt about your payoff amount, contact your loan service provider. They’re required to show you the total amount you’ll need to pay to satisfy a loan.
2. Go over prepayment penalties with your lender.
A prepayment penalty is a fee some lenders charge if you pay off your mortgage early. Most mortgages today don’t have a prepayment penalty, but they do exist. Typically, the only way you’d owe a penalty is if you paid off your entire loan during the first three to five years of your mortgage, according to the Consumer Financial Protection Bureau (CFPB).
Not sure whether you agreed to a prepayment penalty on your second mortgage? Check with your lender to confirm whether a prepayment penalty exists and how much it is.
3. Gather documentation for your second mortgage paperwork
Nobody likes dealing with documents, but the reality is that selling your home involves a lot of paperwork. You can speed up the process by giving your real estate agent or title company copies of your second mortgage paperwork.
To set your title company up for success, you’ll want to nail down two things:
- Make sure that the title of your house is clear. That means there shouldn’t be any outstanding liens or judgments on the property.
- Determine your mortgage payoff estimate. This will be how much you need to pay back to cover both mortgages when you sell.
Kolar says she tries to get that information up front and divvies it out to the parties who need it for her clients.
“The day I meet the seller, I want a copy of their property survey, I want their statements on all their mortgages, I want any disclosures, any documentation, any inspections,” she says. “We’re going to need it at some point, so we might as well get it up front and not waste time later.”
To save yourself time and headaches, look for a real estate agent who wants to speed up the process and who can take care of as much documentation as possible on your behalf.
4. Work with a top agent
Especially if you’re selling your home with a second mortgage, you’ll want to lean on a real estate agent who has a proven sales track record. Remember, if you sell your house with a second mortgage, your sale needs to cover both of your mortgages plus all your selling expenses to make a profit.
Top real estate agents know how to list your home at a price that maximizes your returns. In fact, one National Association of Realtors® study found that homeowners who tapped into a real estate agent’s help secured final home prices that were 26% higher than people who tried to sell a house on their own. Ultimately, that means you could end up with a higher sale price to help you cover the balances on your outstanding mortgages.
If you want to locate a top agent who is an expert at selling in your area, try out the HomeLight Agent Finder platform. You’ll be matched with experienced agents who know how to sell homes in your location and can help maximize your home value when you sell.
5. When you sell a house with a second mortgage, pay off both mortgages
You do need to pay your second mortgage when you sell your home. When the deal closes, your home’s sale price should pay off both mortgages, plus selling expenses. As long as you’ve covered those costs, you’ll then be paid the amount of the remaining proceeds.
“It really should not make a difference how many mortgages you owe and what is owed, so long as you have the money to pay it off,” says Chris Baumann, the business development team leader at Socotra Capital and top loan originator in the San Francisco Bay area.
6. Know what to do if the sale does not cover your mortgage balances
After you do the math, you may find out you’re going to owe more money than you planned after the sale. Although it’s not the ideal choice to have to fork out more than you expected, you may still have options.
“The sales price must be able to pay off both mortgages in full, otherwise you will end up having to come to the settlement table with the difference or enter into a short sale agreement with one or both of the lien holders,” says Paul Swanson, residential mortgage financing expert.
If you can’t pay back your second mortgage, here are your best options:
- Find a way to cover the costs of the second mortgage through separate investments, a windfall, or other avenues.
- Talk to your lender about a short sale. During a short sale, the lender agrees to let you sell the home for less than what they’re owed. Just keep in mind that you must be able to offer the lender proof that you aren’t able to pay off the rest of the mortgage to qualify for a short sale.
Short sales aren’t usually an ideal route because short sales will damage your credit. But Kolar says she helped about 20 sellers do short sales during the Great Recession and “it’s better to sell your house in a short sale than be foreclosed on.”
Find a good, experienced Realtor® that has dealt with second mortgages and is knowledgeable to get that done. There’s all these little steps along the way that if you don’t have a good Realtor® following up, and making sure these steps happen, you’re not going to get to closing on time.
- Renee Kolar Real Estate AgentCloseRenee Kolar Real Estate Agent at Keller Williams Realty Currently accepting new clients
- Years of Experience 36
- Transactions 713
- Average Price Point $168k
- Single Family Homes 697
Sell your house with a second mortgage the easy way
It’s clear that your second mortgage should, under normal market conditions and stable financial circumstances, have no effect on your ability to sell your home.
However, Kolar says there’s one major way you can put yourself firmly in the driver’s seat, particularly if you do have a second mortgage.
“Find a good, experienced Realtor® that has dealt with second mortgages and is knowledgeable to get that done,” she says. “There’s all these little steps along the way that if you don’t have a good Realtor® following up, and making sure these steps happen, you’re not going to get to closing on time.”
Set aside time with your real estate agent to carefully go over each milestone of the process so they can help you through the paperwork. That way, you’ll have all your papers in a row and your second mortgage all tidied up when prospective buyers start lining up to see your house.
Header Image Source: (Rob Christian Crosby/ Death to the Stock Photo)
- "What is a prepayment penalty?," Consumer Financial Protection Bureau (September 2020)
- "Choose Your Term," My Home by Freddie Mac (September 2019)
- "A Second Mortgage Can Be a Useful Financial Tool, but Only In Certain Scenarios. Here’s What You Need to Know," NextAdvisor (December 2021)
- "2021 Profile of Home Buyers and Sellers," National Association of Realtors®, Jessica Lautz et al. (November 2021)