Selling a House With a Mortgage: Know the Potential Benefits & Drawbacks

Selling a Home With An Existing MortgageMany homeowners find themselves looking to sell their homes while still having an outstanding mortgage balance. But what happens when you sell a house with a mortgage? The decision to sell a house with an existing mortgage can raise various questions and considerations that require careful evaluation. From potential financial implications to navigating the process smoothly, there are crucial aspects to weigh before going through the home selling process. The complexities of selling a home with a mortgage can often surprise sellers, prompting them to seek clarity and guidance on the best way forward.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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Can You Sell Your House With a Mortgage?

Similar to how homes can be sold with other liens, homeowners with an existing mortgage can sell their homes. When selling a home with a mortgage, the outstanding balance on the mortgage will need to be paid off from the proceeds of the sale. The remaining amount belongs to the homeowner.

Otherwise, the home-selling process is much like it is when you've fully paid off your mortgage. Overall, selling with a mortgage is feasible with proper planning and communication with all parties involved.

Mortgage Prepayment Penalties

Homeowners need to communicate with their mortgage lender when planning to sell their homes. They should inquire about the exact amount due on the mortgage and any prepayment penalties that may apply. Some mortgages have clauses that impose penalties for early payment, so understanding these terms is crucial.

Selling a property with an open mortgage allows for flexibility without incurring penalties for early mortgage agreement termination. Meanwhile, for closed mortgages, penalties apply if the property is sold before the mortgage term concludes, including prepayment penalties that can be substantial. For sellers looking to avoid these penalties, there might be options depending on their lender, such as porting their mortgage to their new property. 

Apart from prepayment penalties, selling a home with a mortgage may also incur fees that add to the overall cost like:

  • Administrative fees
  • Appraisal fees
  • Reinvestment fees
  • Mortgage discharge fee

Should You Sell a House Early?

Some homeowners may wonder if selling their home early is a wise decision. The benefits of selling early could include avoiding potential financial pitfalls or seizing new opportunities. However, there are also drawbacks to consider, such as potential financial losses or the inconvenience of moving sooner than planned.

Benefits

Homeowners may find that securing a lower interest rate on a new mortgage could lead to significant long-term savings. By obtaining a lower rate when buying a new home and maintaining your original payment amounts, you might pay off the mortgage ahead of schedule. 

Plus, selling your home even when it still has an outstanding mortgage could allow you to take advantage of favourable market conditions, maximizing your home's value and providing more financial flexibility for future endeavours.

Drawbacks

Current economic conditions might hinder a seller's ability to qualify for a new mortgage, potentially steering them towards renting instead of buying again. It also might be a competitive market where it's difficult to find a property at all. Consulting a mortgage advisor to help navigate these calculations could be beneficial in making an informed decision.

Additionally, breaking a mortgage early can result in high fees and prepayment penalties, potentially costing you more in the long run. Despite making larger payments and saving on interest with a new mortgage, these penalties may not be offset. 

Steps to Selling a Home With a Mortgage

Individuals should look into potential mortgage penalties when selling a house with a mortgage. It's crucial to calculate the net proceeds of the sale after considering the remaining loan balance, costs, and fees. Once the financial aspects are clear, it's important to pay off any outstanding loans and associated costs to complete the sale successfully.

Obtain Payout Statement

To initiate the process of selling a home while still having a mortgage, first contact the mortgage lender for a payout statement. This statement will provide details about the outstanding loan balance, applicable fees, and accruing interest until the statement's expiration date. It is crucial to note the expiration date of the statement, as obtaining a new one will be necessary if it lapses.

Look Into Mortgage Penalties

To understand the potential penalties for early mortgage payoff, it is advisable to contact your lender for specific details. If you sell your home before the mortgage term ends, a penalty fee for early contract termination will apply. The fee amount varies depending on the type of mortgage. Options such as porting your current mortgage to a new property or having the buyer take over the existing mortgage can be explored.

Calculate Net Proceeds

Sellers must carefully calculate their net proceeds from the home sale by determining the equity in their property. To do this effectively, they should determine the total amount still owed on the property, including mortgage and home equity lines of credit. The home equity is the difference between the current market value of your home and the remaining mortgage balance. Be mindful of additional expenses associated with selling, like lawyer fees and real estate agent commissions, as they will impact the final profit from the sale.

Pay Loans and Costs

When selling before your mortgage is paid off, the first step is to allocate the sale proceeds towards paying off your remaining mortgage, including associated fees and penalties. After paying off the mortgage, any remaining funds should be used to clear additional debts or liens tied to the property, such as home equity loans or second mortgages. Ensuring that all financial obligations related to the property are fully addressed is crucial. 

Finally, sellers should be prepared to cover all expenses associated with finalizing the sale, which often includes real estate agent commissions. By prioritizing these payments, sellers can successfully navigate the process of selling a home with a mortgage.

Ready to Sell Your Home With an Existing Mortgage?

Overall, selling a home with a mortgage is possible, but it comes with certain considerations and steps that need to be taken. It is important to weigh the pros and cons of selling early and understand the process involved in selling with a mortgage. By following the necessary steps and consulting with professionals, homeowners can successfully navigate the selling process and move forward with their financial goals.

Frequently Asked Questions

Can I Use the Sale of My Home to Pay Off My Mortgage Early?

Paying off a mortgage through the sale of a home is a common practice. It allows homeowners to reduce debt and potentially save on interest costs. Ensure to check for prepayment penalties or clauses.

What Happens if I Sell My Home for Less Than What I Owe on the Mortgage?

If someone sells their home for less than what they owe on the mortgage, they may have to come up with the difference to pay off the loan in full. This situation is known as a short sale.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

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