Selling Your Home With a Second Mortgage

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Once upon a time, you took out a second mortgage or home equity line of credit to do some home renovations, pay your child's college tuition or pay off some debt. Now you want to sell your house, but you're wondering if that's possible when you're carrying two home loans. The answer is yes, but think twice before you put up that "for sale" sign. As you weigh selling your home, keep the following information about your second mortgage in mind.

Know What Type of Second Mortgage You Have

Before you take any steps toward selling your house, look carefully at your mortgage documents to understand the type of loan you are working with.

  • Home equity loan: The bread and butter of second mortgages is the home equity loan, a one-time installment loan based on the equity you've accrued in your home. With this loan, similar to a first mortgage, you repay the amount borrowed over a set period of time often in fixed monthly payments. Each payment goes toward a portion of the interest costs and your loan balance.
  • Home equity line of credit (HELOC): A HELOC is a credit line you can draw from with a maximum borrowing limit. A type of revolving credit similar to a credit card, a HELOC allows you to repay and borrow repeatedly up to your credit limit.

Assess Whether You Will Make a Profit by Selling

Before you decide whether or not you will sell your house, you'll want to get an appraisal of your home and weigh its appraised value with the current amount owed on both of your mortgages. Consider how much you might get for your home given current market conditions, and then see if the profit will help you meet your next homeownership goals. For example, if you want enough for a 20% down payment on your next home, you'll need to compare the likely profit on your current home with the estimated sales price of your next home to see if that's doable.

If you find that you won't make enough selling your home to pay off your debts, or to buy your next property, you may want to wait for market conditions or your financial situation to shift before you move forward with selling.

Find Out if Your Mortgage or HELOC Is Subject to Prepayment Penalties

While prepayment penalties are rare these days, some lenders do charge them. Prepayment penalties usually only apply to the first two to three years of a home loan, so this information is especially important if you want to sell your home soon after taking out a second mortgage. You'll want to factor these penalties into the total amount you still owe, as most penalties are a percentage of the outstanding loan amount—generally up to 2% of the total. Take a close look at your mortgage loan documents and talk to your lender if you still have questions.

Talk to a Financial Advisor and Hire an Experienced Agent

If you've assessed all of the above points and still aren't sure whether selling your home with a second mortgage is a good idea, try seeking the help of a financial advisor who can give you more insight. When it's time to sell your home, an experienced real estate agent who knows the market well in your community can help you get the most for it to help you meet your financial goals.