Maybe your family is growing and you need more space because the starter house you fell in love with just isn’t big enough for your growing brood. Or maybe you’ve been transferred across the country for work and need to sell now. Or perhaps all your kids are off to college, and you’re tired of the maintenance on that two-story family home you’ve been in for 20 years.
Regardless of why you’re ready to move, you likely have a mortgage on your home as they range from 15- to 30-year loans. But that doesn’t mean you’re stuck there until every last cent is paid. You just have to do your research, watch out for the pitfalls and work with the right people to get the most out of your home sale. Here’s how to sell your home before you’ve paid off the mortgage.
Crunch the numbers
Find out how much you owe on your current mortgage
The first step in selling a home with a mortgage is finding out how much you still owe. Get in contact with your lender (or servicer) as soon as possible to request your payoff amount, that’s the total you’ll have to pay to satisfy the terms of your loan, and it includes any interest you owe until you’ve made your payment in full.
Your current balance will appear on your most recent statement. It doesn’t include interest and should not be confused with your payoff amount.
According to the Consumer Financial Protection Bureau (CFPB), your lender is required to provide your payoff amount, so there should be no problem getting it once you ask.
When you close on your home sale, you’ll get in touch with your lender again for the exact payout amount, and you’ll pay off the debt in its entirety with your home sale funds.
Figure out your home sale proceeds
Once you know how much you owe, you need to figure out how much you’ll actually make from your home sale, when all the dust settles.
First, you’ll want to get a realistic idea of how much your home will sell for. For a baseline idea of what your home might be worth, check out a Home Value Estimator, which will pull together home value estimations from five leading sources.
This is just a first step though. A real estate agent will have a better idea of how the market is doing as well as what homes in your area and neighborhood are selling for. He or she will be able to show you a more accurate number by using a comparative market analysis (CMA) for properties similar to yours in your market.
A CMA is more accurate than an online value estimator because it will drill down on details like your lot size, recent upgrades and architectural style in addition to beds, baths and square footage. Don’t make big plans until you’ve spoken with an agent and received an accurate idea of what your home is worth.
Once you have that number, you’ll need to figure out what your home sale proceeds will be. You can use this formula to figure out how much you’ll walk away with:
Start with: the value of your home
(Subtract) the agent commissions
(Subtract) attorney fees
(Subtract) property taxes
(Subtract) title, escrow, notary and transfer fees
(Subtract) your mortgage payoff
Once that math is done, you’ll end up with your home sale proceeds.
Rather than doing the math yourself, you can use tools like Investors Bank’s free, handy online home proceeds calculator.
Things to look out for
Here are a few things you need to watch out for when selling a home with a mortgage.
*Prepayment penalties: If you’re looking to sell your home quickly after purchasing it, you might be subject to prepayment penalties. Some mortgage lenders will penalize sellers looking to prematurely pay off their mortgage faster than the original agreement, and this is because many financial institutions rely on interest payments as revenue. It varies by lender, but it’s typically a percentage of the interest-only mortgage payments for a set of time. A helpful real estate agent should be able to aid you in determining if these penalties will apply.
*The market: Selling a home before your loan is paid off is doable, but it can be tough if your home has declined in value since you bought it. If your home is worth less than the outstanding balance on your loan, it gets complicated. If your home is underwater, you’ll have to take all of the money from the sale as well as personal funds to pay off the mortgage. It’s not as common as it was after the 2008 Great Recession, but it can still happen; 1.1 million homeowners are still underwater, according to Market Watch.
*Timing and logistics: Discuss the climate of your area’s mortgage market with your agent. In some cities, where the number of buyers is higher than the number of available homes, some lenders will restrict your ability to apply for a new mortgage before you’ve sold your house. And in some hot markets, you’ll need a contract on the home before a lender will approve your next mortgage. Waiting until then to find your next home can be a logistical challenge, and often real estate agents will work together to allow the homeowner to remain in the home for additional time as you try to find your new home. Sometimes temporary housing is the solution.
*Other sale routes: If you need the cash but the traditional selling method isn’t in the cards for you, you could always think about a reverse mortgage, a loan that allows seniors over 62 to convert home equity for retirees while remaining in their homes, or selling quickly to an investor or iBuyer such as Opendoor, Offerpad or Redfin to name a few.
Find the right lender
Shop around for a lender that will provide the best loan terms for your particular situation. Mortgage rates are changing, and while they will have a narrow range from bank to bank, fees can be dramatically different. Get a good understanding of all the facets, and you’ll save yourself a ton of money in the long run.
Be sure to do thorough research and talk with an agent and lender before making any final decisions. To find the perfect lender for you, start here.