Can You Sell Your House With a Home Equity Loan or HELOC?

You can sell your house if you have an open home equity loan or HELOC, but the decision may involve more than a simple yes or no. Selling with a home equity loan or HELOC has its advantages, but it also comes with potential complications, like prepayment penalties or unexpected costs, that could impact your finances.

For some, paying off these loans with the sale proceeds is straightforward; for others, it might be challenging if property values have dropped or if closing costs cut into their equity. Keep reading to learn when selling with a home equity loan or HELOC makes sense—and when it might be worth exploring other options.

Can you sell your house with a home equity loan or HELOC?

In most cases, you should have no problem selling your home with an open home equity loan or HELOC. It’s not uncommon for homeowners to do so, and it’s usually straightforward. 

However, certain lenders may charge prepayment penalties to disincentivize you from paying off your loan early. Lenders want to make as much interest as possible—and paying off your loan early will save you from handing over these valuable interest payments.

If your lender charges a prepayment penalty, you’ll need to pay an additional fee to close the loan or HELOC and to close the sale of your home. So you can sell, but it might come with a cost. Ensure you understand your lender’s terms before deciding to sell. This shouldn’t be a surprise if you reviewed these terms before signing your loan or HELOC papers.

How to sell a home with a home equity loan or HELOC

When you take out a home equity loan or HELOC, these loans use your home as collateral. You risk losing your home if you can’t keep up with loan payments.

Because your home is collateral, when you sell your home with a home equity loan or HELOC, that loan or line of credit becomes due. The goal is often to use the home sale proceeds to pay off your mortgage and loan as soon as you sell. 

One requirement of home equity loans and HELOCs is that before closing, the lender must send you a Truth in Lending Real Estate Integrated Disclosure (TRID) form. This document shows how you’ll spend the sale proceeds—for example, on your remaining mortgage balance and home equity loan or HELOC. 

A TRID form will also show you the proceeds, if any, you’ll receive after these payments are made. But if you owe more on your mortgage and home equity loan or HELOC than your home’s selling price, it will note how much you must pay to cover the difference.

Example

Jenny owes $200,000 on her mortgage and $30,000 on her HELOC, with her home selling for $350,000. Before closing, her lender sends a TRID form showing how the sale proceeds will be applied: $200,000 to her mortgage, $30,000 to her HELOC, with $120,000 left after closing costs.

At closing, the title company uses the sale proceeds to fully pay off her debts, and Jenny receives the remaining $120,000.

When selling a home with a HELOC or home equity loan might be a challenge 

Selling a home with a HELOC or home equity loan is often straightforward, but it can be more challenging in the following scenarios.

Your lender charges steep prepayment penalties

As we mentioned, certain lenders charge prepayment penalties for paying off your home equity loan or HELOC early, which can cut into your sale proceeds.

While none of the lenders on our top-rated HELOC and home equity loan lists charge prepayment penalties, fees from lenders that do charge this fee range from 1% to 5% of the loan balance or can be a flat fee of $300 to $500.

To determine if your lender charges a prepayment penalty, review your loan agreement or ask your lender directly. Look for terms like “prepayment penalty” or “early payoff fee” in the documents you received at signing, as these outline any costs for paying off the loan before the term ends.

Example

Mark took out a $50,000 HELOC for home renovations, with a loan term that includes a 2% prepayment penalty if he pays it off within the first five years.

After three years, he decides to sell his home. Because of the prepayment clause, he faces a $1,000 fee to close the HELOC early. This cuts into his proceeds, reducing the funds available for his next home purchase or other needs.

Your home has lost value

If your home has lost value since taking out a home equity loan or HELOC, you might not be able to repay it—and what’s left on your mortgage—with the proceeds from the sale. In this case, you must cover the difference.

For example, say you purchased your home for $300,000. You still owe $225,000 on your mortgage plus $30,000 on a home equity loan—so you owe $255,000. But the market has dropped since you bought your house, and now it’s worth $250,000. 

If you sell your home for $250,000, you must come up with an additional $5,000 to repay your remaining mortgage and home equity loan. 

Example

Emma purchased her home for $400,000 and took out a $25,000 home equity loan for a kitchen remodel. She still owes $300,000 on her primary mortgage and $20,000 on the home equity loan, totaling $320,000 in debt. Due to market changes, her home is now worth $310,000. When she sells, she falls short of covering the total debt by $10,000, which she would need to pay at closing to complete the sale.

The proceeds from the sale aren’t enough to afford a new home

After paying back your home equity loan and mortgage, it’s possible you won’t have enough to purchase a new home. 

Even if you don’t owe anything when you sell your home, you could get into a challenging situation if you can’t afford to move somewhere else. 

Example

Sophia and Carlos are ready to move to a new city. They sell their current home for $350,000, which covers their $280,000 mortgage and the $40,000 remaining on their HELOC. However, after paying off these loans and covering closing costs, they’re left with only $20,000 in net proceeds.

In their desired location, down payments are significantly higher, and they realize the remaining funds aren’t enough for the upfront costs of their new home.

FAQ

What if I won’t make enough from my home sale to pay off the home equity loan or line of credit in full?

You still have options if you don’t make enough from your home sale to cover the home equity loan or HELOC in full. 

First, if you have flexibility, you can wait until your home appreciates in value or until you can pay off more of your home equity loan or HELOC. 

But suppose you need to sell your home immediately. In that case, other options may be available, including:

• Negotiating with your lender: Your lender might be willing to settle your loan for less than the original amount, known as a short sale. 
• Taking out a personal loan: Depending on your situation, you may be able to take out a personal loan to cover your home equity loan or HELOC. 
• Selling other assets to pay the difference: Even if you don’t have cash available, you may have other assets—such as investments, vehicles, or property—you could sell to cover the difference. 

None of these options is ideal, especially if they put you in a more difficult financial situation in the future. For example, cashing out investments in your retirement account can solve your problem today—at the cost of your future financial security. 

Make sure you consider all the risks before taking out another loan or selling valuable assets, and consider speaking with a financial advisor to make an informed decision. 

What if the HELOC or home equity loan has no or a low balance?

If your HELOC or home equity loan has a low balance and you can pay it off with the proceeds of your home sale, there’s no issue. You’ll pay off the remaining balance when you close on the sale of your home.

If you have no balance on your home equity loan, the lender has no claim to your home, and you can go ahead with the sale. If you have an open HELOC with no balance, you need to request that your lender close your account so you can finalize the home sale.