Here’s What Happens When You Sell Your Home While Owing Money on a HELOC

Tapping the equity in your home can be a good way to borrow money when you’re looking for an alternative to taking out a personal loan. And while you might appreciate the predictability of a home equity loan, you might choose a home equity line of credit, or HELOC, instead because it gives you more flexibility.

After all, a HELOC doesn’t force you to borrow a single sum of money at once. You can draw from your HELOC at different points during the preset window your agreement allows for.

As of the first quarter of 2023, outstanding U.S. HELOC balances came to $339 billion, according to the Federal Reserve Bank of New York. So clearly, it’s a pretty popular borrowing choice.

If you owe money on a HELOC, you may be wondering how it might impact your ability to sell your home. The good news is that you’re allowed to sell a home even with an outstanding HELOC balance. But there may be some financial implications you’ll need to carefully consider.

How a home sale works with a HELOC

The goal of HELOC lenders is to get paid. And so HELOCs aren’t designed to prevent the sale of a home, because when a home is sold, HELOCs are repaid sooner.

A HELOC is considered a second mortgage. So when you sell your home, first, the proceeds from that sale will go to your current mortgage lender. From there, the remaining proceeds will be used to pay off your HELOC. Only once those debts have been satisfied will you get any money from the sale of your home to pocket yourself. But as long as you’re prepared for that, there shouldn’t be any problems.

An issue might arise, however, if your home doesn’t sell for a high enough price to pay off your mortgage and HELOC in full. Let’s say your home sells for $270,000, and you owe your mortgage lender $250,000 and your HELOC lender $30,000. In that case, you’re $10,000 short. So you’ll need to come up with the remaining money to pay off your HELOC yourself.

You should also know that some HELOCs come with early termination penalties. So if you close out and pay off your HELOC in conjunction with selling your home, you may be on the hook for a fee. You can find out if that’s the case by reading through your agreement.

Should you try to repay your HELOC before selling your home?

You don’t necessarily have to wait to repay a HELOC before selling your home if you’re confident your property will fetch a high enough sale price to satisfy that debt. Otherwise, you may want to wait until your home’s value rises before selling it.

But if your home’s value has recently risen and that’s what’s prompting you to sell, then you might specifically want to move on that listing sooner rather than later. And you wouldn’t want an outstanding HELOC balance to hold you back.

Repaying a HELOC could take years, and you don’t necessarily want to put major life plans on hold while you’re paying off that debt. Just be aware of the fees that might ensue if you pay off or terminate your HELOC early in conjunction with selling your home.