Do You Have to Pay Back a Home Equity Loan or Line of Credit When You Sell the House?
The short answer is yes. When you sell your home, a home equity loan or line of credit (HELOC) is considered a lien on your home's equity. This means that when your mortgage is satisfied, the proceeds from the sale will first be used to repay the HELOC before you receive any additional funds.
Understanding Lien and How It Works
A lien is a legal claim on your property, guaranteeing that the lender will be paid the amount they lent out, whether you are refinancing your mortgage or using a home equity loan or line of credit. This lien remains in effect until the debt is fully settled.
Process of Repayment
When you sell your house, the buyer's check goes directly to your lender. This is a typical part of the home-selling process, ensuring that the lender gets their money first. As an owner, you should expect that the funds from the sale go towards paying off any outstanding debts, including the home equity loan or HELOC.
Failure to Repay: Consequences
Failure to repay your home equity loan or HELOC can have serious consequences. For instance, the lender can pursue repossession of the property, and the debt will remain on your credit report, affecting your credit score. Furthermore, any remaining balance on the HELOC might result in other legal actions, including wage garnishment or liens on other properties you own.
Financial Planning When Selling Your House
When planning to sell your house, it's crucial to understand the obligations associated with home equity products. Repaying your home equity loan or HELOC ensures that you do not face any financial liabilities later and sets a good financial precedent for the future.
Especially, if you are refinancing or taking out another loan, having a clear plan for repayment is essential. This includes being aware of the terms of the loan and any interest charges that might apply. The escrow company, during the escrow period, will handle the repayment process, ensuring that the lender receives the owed amount before you receive any net proceeds from the sale.
Conclusion
In summary, selling your house does not eliminate the obligation to repay your home equity loan or HELOC. The funds released from your home sale are first allocated to paying off the loan, and you should be prepared for this process.
Make sure to plan ahead and address any outstanding debts to avoid any financial complications down the line. Consult with a financial advisor or a real estate professional to ensure a smooth and stress-free selling process.