What Happens When You Sell a House With a Mortgage?

The average seller lives in their home for 5-10 years before selling, according to the Zillow Group Consumer Housing Trends Report 2021 but the most common home financing is a 25-year term. So if you’re wondering what happens to your mortgage when you sell your home, you’re not alone.

It turns out that 63% of homeowners are still in the process of paying off their mortgages. If you’re thinking of selling but are locked into another 17 years of mortgage payments, here’s what you need to know.

What happens to your mortgage when you sell your home?

Ideally, when you sell, you’d have enough equity to pay off your loan balance, cover closing costs, and turn a profit. Upon closing, the buyer’s funds first pay off your remaining loan balance and closing costs, then you are paid the rest. If you’re selling your home relatively soon after purchasing, check with your lender to see if a prepayment penalty applies to your loan.

 How to find out how much is left on your mortgage

Getting your payoff amount is the best way to get an accurate estimate of how much you still owe on your mortgage. You can get your payoff amount by contacting your lender by phone or online. Note that the payoff amount is different from the remaining loan balance you see on your monthly mortgage statement. The payoff amount includes the accrued interest as of the closing date, making it a more accurate figure. When you get your payoff quote, your lender will let you know how long the quote is good for — typically between 10 and 30 days.

Even if you’re a few months away from selling, getting a payoff quote from your lender can help you estimate your home sale profit early in the process.

What is equity?

Equity is your financial stake in the home. It’s the dollar value you earn on your home at the time of selling, after paying off your loan and deducting other selling-related expenses. Of course, determining your equity can be a bit more complicated if you’ve taken out a home equity line of credit (HELOC), you have a home equity loan on the home or you have unpaid liens on your property. Two types of equity make up your entire home equity.

Home investment equity

This is the equity gained by your actual financial investment in the home over the years. It includes:

• Your original down payment
• Mortgage principal payments made each month
• The actual cost of any upgrades or renovations you’ve made

Earned equity

Earned equity is the additional profit you see at resale due to market conditions. Earned equity is not realized until you sell your home. It includes:

• The equity you’ve gained as home values in your local real estate market has increased
• Additional ROI gained as a result of improving or upgrading your home

 What happens to equity when you sell your house?

When you sell your home, the buyer’s funds pay your mortgage lender and cover transaction costs. The remaining amount becomes your profit. That money can be used for anything, but many buyers use it as a down payment for their new home. Here’s how the money is divvied up.

1. Your loan is repaid to your mortgage lender.
2. Any additional loans (like a home equity loan) are paid off.
3. Closing costs are paid (including agent commission, taxes, lawyer fees)
4. The remaining profit is transferred to you, the seller.

Assuming your home hasn’t dropped in value since you bought it and it’s worth more than you owe on it, you should make a profit at resale. Note that when calculating profits, some of your equity will always have to go to the transaction and closing costs.

What if I don’t have enough equity to pay off the mortgage?

When you don’t have enough equity to pay off your loan, it’s called having negative equity or being underwater. If you need to sell but don’t have enough equity (especially after considering closing costs), you’ll need to either bring money to the closing table to cover the shortfall or consider selling with a short sale.

Short sale for underwater homes

If your home’s value has dropped since you purchased it, you may owe more than it’s worth. If you find yourself in this situation and can’t wait until market conditions improve to sell, a short sale may be your only option. In a short sale, the bank must agree to let you sell the home for less than what you owe on it since they’ll be getting less money than what they’re owed.

A short sale can damage your ability to buy a new home in the future, both because you will forfeit your original down payment amount to get out from under the home and because it will negatively affect your credit score.

What happens to your mortgage when you sell your house and buy another?

More than half of sellers (65%) are attempting to buy and sell at the same time, and what happens to your mortgage depends on which transaction closes first.

What happens to your mortgage when you sell first?

It’s easier to sell first because you won’t have to worry about paying two mortgages at once. And your equity is freed up before you need it for a new down payment, which can make buying a new home considerably easier.

What happens to your mortgage when you buy first?

If you’re trying to buy your new home before selling the old one, you’ll have to get creative about how to fund the down payment, since your equity is still tied up in your existing home. Here are a few options.

Contingent sale: When shopping for your new home, you can submit offers with a contingency, which notes that you can’t close until your first home sells. In a competitive market, sellers may be less inclined to accept a contingent offer, but if you can get it accepted, you can put the home you want under contract while you work on selling.

Bridge loan: A bridge loan is a temporary loan that helps you pay for your new home’s down payment while you wait for the equity in your old home to free up. You’ll make payments on both your mortgage and the loan while you wait for your home to sell. Note that if your old home takes a long time to sell, you could be on the hook for two mortgages and one loan payment per month until it sells, which can be a huge financial burden.

Have more questions? Let’s discuss. Please give me a NO OBLIGATION call at 647-992-7139, if needed I can connect you with an efficient mortgage agent.