The usual seller resides in their home for 13 years prior to selling. So if you are thinking about what happens to your mortgage when you sell your home, you’re not the only one.
Furthermore, our Laguna Niguel Real Estate Agents say it turns out that 59 percent 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 will need to know.
What Happens to Your Mortgage When You Sell Your Home?
When you market, ideally you’d have sufficient equity to pay off your loan balance, cover closing costs and turn a profit. Upon closing, the buyer’s funds first to pay off your remaining loan balance and closing costs, then you are paid the rest.
If you are selling your home relatively soon after buying, our Laguna Niguel Real Estate Agents suggest you 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 perfect way to get an accurate estimate of how much you owe on your mortgage. You can get your payoff amount by contacting your lender by phone or online. Notice that the payoff amount is different than the remaining loan balance you see on your monthly mortgage statement.
The payoff amount includes the accrued interest as of the final date, making it a more accurate figure. When you get your payoff quote, your lender will allow you to 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 the lender can help you estimate your home sale profit early in the process.
Equity is the 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 little 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. There are two kinds of equity that make up your entire home equity.
Home Investment Equity
This is the equity gained by your actual financial investment in the home through 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
Our Laguna Niguel Real Estate Agents say that earned equity is the additional profit you see at resale due to market conditions. In addition, most Laguna Niguel real Estate Agents will tell you that earned equity is not realized until you sell your home. It includes:
- Equity you’ve gained as home values in the local real estate market have 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, our Laguna Niguel Real Estate Agents say the buyer’s funds to pay your mortgage lender and cover transaction costs. Here’s the way the money is divvied up. Any additional loans (such as a HELOC or home equity loan) are paid off.
The remaining profit is transferred to you, the seller. Assuming your home hasn’t dropped in value since you bought it and it is worth more than you owe on it, most Laguna Niguel Realtors will tell you that you should make a profit at resale. Note that when calculating profits, some of your equity will always have to visit 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 is called having negative equity or being underwater. If you will need to sell but don’t have enough equity (especially after considering closing prices ), you’ll need to either bring money to the closing table to cover the shortfall or consider selling with a brief sale.
Short Sale For Underwater Homes
If your home’s value has dropped since you purchased it, our Laguna Niguel Real Estate Agents say you may owe more than it’s worth. If you find yourself in this situation and can’t wait until market conditions improve to market, 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.
Our Laguna Niguel Real Estate Agents say 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 is going to negatively affect your credit score.