When a home is sold, a HELOC must be paid off, along with any other debts secured by the property. Outstanding HELOC balances are typically settled during the closing, out of the sale proceeds.
Can you sell your house if you have a home equity loan? You don't have to pay off your home equity loan or other liens to list your home for sale. At the sale's closing, creditors holding liens on your home's title will be paid off from the proceeds of the sale.
Key Takeaways
A home equity loan allows you to use the equity that you've built in your home as collateral to borrow a lump sum of cash. The loan is secured by the property in the form of a lien, meaning that the lender has permission to foreclose on your home if you fail to keep up with repayments.
A loss in the value of your home:
When this happens, your lender can enforce a HELOC reduction so that your borrowing limit is based on just the equity that remains. If you are in a situation of negative equity, you will see an a HELOC freeze.
Rates are variable
Even if you take out a HELOC at a lower rate, you could face much higher interest rates when it comes time to repay. “Variable rates can turn your payments into a financial rollercoaster,” warns Linda Bell, senior writer on Bankrate's home lending team.
Consider a HELOC if you are confident you can keep up with the loan payments. If you fall behind or can't repay the loan on schedule, you could lose your home.
Using a HELOC to fund a vacation, buy a car, pay off credit card debt, pay for college, or invest in real estate is not a good idea.
One of the biggest risks of a HELOC is that your home serves as collateral. If you miss payments, you could face foreclosure. Defaulting on a HELOC is not like defaulting on a credit card. With a credit card, you might get hit with late fees and a lower credit score, but with a HELOC, you could lose your home.
If you take out a $50,000 home equity loan, you will receive all of the money at once and pay interest on the full amount. With a HELOC, you can withdraw money whenever you need it.
Home equity loans and HELOCs are secured by your property, meaning that if you default on payments there is a risk of foreclosure, repossession, or garnished wages.
If your home appraises at a higher value, consider cashing in on your home equity by selling. Depending on how much your home has increased in value and how much equity you've built, you may make a substantial profit selling while homes are still in high demand.
Yes. This is the case for home equity related financial products such as fixed rate home equity loans, home equity lines of credit (HELOCs), and cash out refinances. Lenders require an appraisal for home equity loans to protect themselves from the risk of default.
Yes, home equity loans have closing costs. As with any mortgage loan, you'll pay several closing costs when taking out a home equity loan or home equity line of credit (HELOC). You can expect to pay 2% – 6% of your total loan amount in closing costs for a home equity loan.
Whether you plan to pay off your HELOC when you sell your home, are refinancing or experience a financial windfall, a prepayment penalty could be an unexpected charge. Most prepayment penalties are about 2% of your loan balance, but the amount varies by lender.
Having a HELOC doesn't prevent you from selling. However, your HELOC balance is repaid from the sale proceeds along with your mortgage, which means less money in your pocket at closing.
If you've taken out a home equity loan (or home equity line of credit) against your home, you can still sell it. If you do so, you will need to pay back the remainder of your loan, and most people use the money generated from the property sale to do that.
If you fail to repay your HELOC, your lender may foreclose on your home and you could end up losing it to the bank. In addition, you will have a negative hit to your credit score, making future borrowing more costly or difficult.
For example, if you're remodeling and need to transfer $20,000 from your home equity line of credit (in one institution) to your bank account (in a different institution), you can write a check to yourself to transfer the money.
HELOCs in particular can be a trap. “Many homeowners find it difficult to stay disciplined in paying down the principal on their line of credit,” Bellas says. During the initial draw period, “most HELOCs only require you to pay down the interest every month, similar to how a credit card has a minimum payment.
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
Bottom Line. A HELOC can be a valuable tool for homeowners needing flexible access to funds. While HELOCs offer advantages like lower interest rates and interest-only payments during the draw period, they also carry risks, including variable rates and potential foreclosure.
A home equity line of credit or HELOC is another type of second mortgage loan. Like a home equity loan, it's secured by the property, but there are some differences in how the two work. A HELOC is a line of credit that you can draw against as needed for a set period of time, typically up to 10 years.