If You Have a Home Equity Loan, Do You Have to Pay Off the Loan Before You Sell Your House?
A home equity loan utilizes the equity you have built in your home as collateral for a new debt. Typically, this debt goes toward improvements to the property, but it may also be used to purchase college educations, vehicles, vacations or any type of expense. Regardless of what you use the money for, though, the home is still tied to the debt. When you sell your home, you will be required to repay or transfer the loan.
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Structure
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Most home equity loans include a due-on-sale clause in the loan documents. A due-on-sale loan is structured to mandate you repay the full loan amount either when it has matured or when you sell the home, whichever comes first. The first steps to understanding the terms of your loan is reviewing the contract and searching for this clause. If the clause is present, you will need to repay the loan when you sell the home.
Explanation
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The due-on-sale clause is in place because the home equity loan was issued only with the home as collateral. If you sell that piece of collateral, the home equity lender has no insurance you will not default on the debt. This would greatly change the risk associated with the home equity loan. You will be asked to close your home equity loan if you no longer have the collateral used to keep the loan active.
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Alternatives
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Instead of closing the loan, you may attempt to replace the original collateral with a new source of collateral. For example, if you have already purchased a new home, you may be able to refinance your home equity loan to use this home as collateral instead of your old house. By changing out the collateral, you have replaced the insurance a lender needs to keep a home equity loan in effect.
Considerations
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If you have a due-on-sale clause in your home equity loan and do not have collateral to replace the old house, you will have to repay the loan. You can do this by taking a new loan without any collateral. This can be expensive; unsecured loans tend to have higher interest rates than secured loans. You may also consider taking a cash-back mortgage on the next home you purchase. By taking a loan larger than the sum you need to purchase your new property, you may have the extra money needed to close the home equity loan on your previous home.
Warning
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Many homeowners consider taking a home equity loan to fix up their home prior to its sale. When you do this, you leave yourself little time to repay the debt before it is due in full. If your home sells for less than you owe on your mortgage and home equity debts, you could be in a difficult financial position. When taking a loan to prepare your home for sale, budget a low amount and make only necessary changes.
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