You go through the tedious steps to finance your dream home, and maybe even plan to stay for the long haul.
Then, life happens.
Your job relocates you, your family takes you across the country, or you just fall in love with another house in a new neighborhood. And putting your house on the market just makes the most sense. Sound familiar?
With mortgages ranging from 15 to 30 years, chances are your current loan isn’t fully paid off when it comes time to sell. So are you stuck where you are until you’re paid off every last dollar?
“Most of my sellers have a mortgage,” says Rebecca Carter, a top real estate agent and multimillion dollar producer in Knoxville, TN.
But the devil is in the details. You want to watch out for things like prepayment penalties, the fluctuations of the real estate market, and choosing the right lender for your needs, or you’ll risk taking hits to your bottom line.
You should also determine exactly how much you still owe to make sure the sale of your current home pays off the remainder of your mortgage. Otherwise, you could be facing a shaky financial situation where you owe more than your home is worth—a position that no homeowner wants to be in.
We spoke with real estate and lending experts who have gone through this process hundreds of times to put together this guide selling your home before you’ve paid off the mortgage. That way, you won’t run into any unexpected roadblocks, or leave money on the table.
First, Figure Out How Much You Still Owe on Your Current Mortgage
If you’re thinking about selling before paying off your mortgage in full, the first thing to do is find out roughly how much you still owe.
Contact your lender or servicer and request your payoff amount. The payoff amount is the total you’ll have to pay to satisfy the terms of your mortgage loan, including any interest you owe until the day you plan to pay your loan in full.
The payoff amount is not the same as your current balance, which will appear on your most recent account statement and may not include interest.
Your lender is required to provide your payoff amount to you, according to the Consumer Financial Protection Bureau, so don’t be shy about asking.
Once you close on your house, you’ll be in touch with your lender again for an exact payout amount and use your home sale funds to pay off the debt in its entirety.
Next, Crunch the Numbers on Your Home Sale Proceeds
Knowing how much you owe, it’s time to figure out how much you’ll be making from your home sale after all is said and done.
To do that, you need to get an idea of how much you can fetch for your home.
If you want to get a baseline idea for what your house might be worth, use HomeLight’s Home Value Estimator to pull together home value estimates from 5 leading sources.
The automated valuation tool is just a starting point, though. Your real estate agent will give you a more accurate number using a comparative market analysis (CMA) that compares your home to similar properties in your neighborhood.
In addition to accounting for the basics like beds, baths and square footage, the CMA drills down into the nitty gritty—like your lot size, whether you’ve done any recent upgrades, and the architectural style of your home. You won’t really know how much your home is worth until you get the CMA back from your agent, so don’t jump the gun.
From there, use this simple home sale proceeds formula to figure out how much you’ll walk away with:
- Start with: the value of your home
- (Subtract) the agent commissions
- (Subtract) attorney fees
- (Subtract) property taxes
- (Subtract) title, escrow, notary, and transfer fees
- (Subtract) your mortgage payoff
- Equals: your home sale proceeds
In addition, Investors Bank, an East Coast bank that has been in operation for more than 90 years, offers this free, handy online home sale proceeds calculator.
The calculator will guide you through entering the different pieces of information you need to figure out what you’ll make on the sale of your home when you’re selling with a mortgage.
Property tax tip for your home sale proceeds: According to Ray Brousseau, the president of California-based Carrington Mortgage Services and an expert in residential mortgage lending, whether or not you’ll have to pay property taxes on your home sale is dependant on your municipality’s real estate tax schedule.
In some instances, cities and towns will collect taxes for the upcoming year, meaning that the sale of your home midway through the calendar could result in a refund.
In other states, homeowners pay property taxes “in arrears,” meaning you’re paying taxes for the time period leading up to the billing cycle. That could leave you with unpaid property taxes, and you are responsible for paying property taxes on your home up to (but not including) the day you close.
Need a Fast Out? You Could Sell to an Investor Instead
If your timeline just doesn’t allow for waiting around, and your top priority is to sell your home quickly without the hassles of staging and showings, there is another option on the table.
You’ve probably seen the billboards—investors who offer to buy your home for cash “as-is” have been around for some time.
That’s because some homeowners will always want a no-fuss sale. The demand for a simple transaction has made way for a batch of new high-tech players to enter this space, meaning if you want to sell to an investor, you now have more avenues to choose from.
Opendoor, Offerpad, and Redfin are just a few of the big startups experimenting in this space with different offerings to homeowners, including instant cash offers and home trade-in deals.
Selling to this type of investor would mean you’d receive the funds from your home sale within as soon as a few days. This can be a good avenue for a family in a rush to move who doesn’t have the time to wait for a specific buyer.
What to Watch Out For When Selling Your Home with a Mortgage
While it may seem simple on the surface, selling a home that isn’t fully paid off can present challenges.
Here are a few issues to look for and discuss with your real estate agent:
While they aren’t as common in today’s market, you may be subject to a prepayment penalty if you look to sell your home particularly quickly after purchasing.
Because many financial institutions rely on interest payments as revenue, some mortgage lenders will penalize sellers looking to prematurely pay off a mortgage faster than the originally agreed upon time frame of the loan.
While it varies by lender, the penalty is typically structured as a percentage of interest-only mortgage payments for a set amount of time, i.e. 75% of six months of interest-only payments. A good real estate agent will help you be able to determine whether this type of penalty applies.
The Direction of the Real Estate Market
Selling a home before it’s paid off can be simple, so long as your home hasn’t declined in value since you bought it. If your home is worth less than the outstanding balance on your mortgage—that’s called being underwater—things become more complicated.
“After the so-called crash in 2007 and 2008, that was a problem,” Carter says. “The home values had gone down, so sellers owed more than what they could sell their home for.”
In this case, a homeowner would have to take all of the money from the sale of their home as well as any personal funds in order to fully pay off their mortgage. In some cases during the Great Recession, homeowners simply walked away from properties in areas where home values had fallen particularly sharply and they owed more in their mortgage than the home was worth.
Today, we don’t really have that problem as most real estate values have gone up. However, it’s something to be aware of in order to sell your home at the right time. According to Market Watch, 1.1 million Americans are still underwater.
Timing and Logistics of Getting Your Next Mortgage
You’ll also want to discuss with your real estate agent the climate of your area’s mortgage market, says Carter. In growing cities where buyers outnumber the supply of available homes, some lenders will restrict your ability to apply for a new mortgage before you’ve sold your current property.
“I tell my sellers to wait to look until they have a contract on their home,” Carter says. “There’s no point in going out because they’ll see things, and their offer won’t be accepted or it’s going to be gone.”
In hot markets, you’ll need to have a contract on their home before a financial institution will approve your next mortgage.
Waiting until you have a contract on your current home before you start shopping for your next property can present something of a logistical challenge. Often times, real estate agents can work together to allow the homeowner to remain in their home another 10 to 15 days after the closing to allow for extra time to shop around.
If that’s not enough time, temporary housing may be the solution.
Shop Around For The Right Lender
No matter how many times you’ve sold a home or taken out a mortgage, it’s always important to shop around for a lender that provides the best loan terms.
“Mortgage companies, banks, they all really vary in products, rates and fees,” Carter says. “I always advise people to talk to at least three and get an idea of what they can offer and what it’s going to cost you.”
While mortgage rates will likely fall in a narrow range from bank to bank, fees can vary dramatically. Getting a good understanding of all the different components can end up saving you thousands of dollars. The key here is to make sure only a small handful actually pull your credit, which can actually bring down your credit score.
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