First time home buyers often wonder how you can sell your house if you have a mortgage because at first glance it looks like you’ll end up owing your lender a lot of money in interest. Fortunately, this isn’t the case. Here’s a step by step explanation of how you can sell your house if you have a mortgage and why you don’t automatically end up drowning in debt.
Yes, you can sell your house if you have a mortgage, but it’s not always the best choice. Before you decide whether to sell, you need to know your current:
- Home value
- Mortgage payoff amount
- Sellers costs
Then you can work out if you’ll still have a debt or if you can walk away with money in your pocket.
If this seems like a complicated process, don’t worry. It is relatively easy to make the calculations. I’ll show you how, and let you know the other, hidden things you need to consider before putting your mortgaged house on the market
How Can You Sell Your House If You Have A Mortgage?
On the face of it, it seems that if you sell your home while you still have a mortgage, you’ll be left with a huge debt to the mortgage company. The theory looks like this:
- You have a 30-year mortgage of $200,000 at an annual rate of 3%
- The interest on your mortgage comes to $102,883
- You owe a total of $302,833
- You sell your house for $250,000
- You still owe $52,833 on the mortgage
But guess what?
This’s not what happens.. To understand why we have to look at how mortgage interest and your mortgage payments work.
Now, to begin with, what many people do not realize is that the interest amount quoted by your lender is the total amount of interest you will pay over the full term of the loan.
However
You only pay interest while you owe the money. If you pay back the loan earlier than planned, you pay less interest. You also only pay interest on the amount you owe, which decreases every month.
Let’s walk through how this happens
Using the previous example of a $200,000 loan, what actually happens is this:
Your mortgage payment is $843.21 each month. Part of the $843.21 you pay is interest and part of it is used to pay off a piece of your principle, which is the amount you have borrowed.
So, in month one the $843.21 is split like this:
Interest : $500.00
Payment off of principle: $343.21
Total principle left owing: $199,656.79
Every month your debt is slightly smaller and as a result, every month less of your $843.21 is eaten up by interest and a little more comes off of the principle.
So, for example when you get to the first month of year three, your $843.21 payment is now split like this:
Interest: $467.72
Principle: $375.49
Total principle left owing: $186,712.83
Now, let’s assume you have decided to sell your home. You contact your mortgage lender and ask how much your mortgage payout would be this month. Excluding any fees the lender may charge, your payout would be the total principle left owing, which in this case is $186,712.83. So instead of our incorrect theory that says:
- You have a 30-year mortgage of $200,000 at an annual rate of 3%
- The interest on your mortgage comes to $102,883
- You owe a total of $302,833
- You sell your house for $250,000
- You still owe $52,833 to your lender
- You are left with a debt of $52,833
What actually happens is this:
- You have a 30-year mortgage of $200,000 at an annual rate of 3%
- The interest you pay for the time you have the mortgage is $5,685.02
- Your total principle left owing is $186,712.83
- You sell your house for $250,000
- You pay back the outstanding $186,712.83
- You are left with $63,287.17 “profit.”
Now, this example doesn’t take into account all of the other costs of selling up, which we’ll get to in a moment. However, I wanted to show you how interest paid to your lender and your mortgage system works.
How To Calculate If You Can Afford To Sell Your House If You Have A Mortgage
The first thing to do if you are considering selling your home while you still have a mortgage is to contact your mortgage lender and ask how for your current mortgage pay off the figure. Don’t worry, asking for this figure does not place you under any obligation to move forward and sell your house.
A Word Of Caution
Your mortgage pay off figure will only be valid for approximately ten days. After this additional interest may be added or you might make a payment and the principal will reduce. If you are using this info as a rough guide, don’t worry. If you are using it to actually pay off your mortgage, contact your lender to confirm the correct amount before making a payment.
You should also confirm, if applicable, whether or not this amount includes any early mortgage payoff fees.
Next, you need an estimate of the value of your home. If you are only vaguely wondering if you can afford to sell your home, but not seriously considering it, you can take a look at similar homes in your area and current prices as a rough guide. If it is something you are seriously considering, think about asking a real estate agent to give you an estimate.
Once you have your home value you can use the following process:
- Add together the cost of:
- Real estate agent commission
- Sales costs such as transfer fees, escrow, notary fees etc.
- Property taxes and any other outstanding costs connected to your home
- Legal costs, if any
The total is your Cost To Sell.
- Add your cost to sell and your mortgage payoff costs, for your Total Costs
- Take your Total Costs away from the value of your home and the result is how much you will be left with, or left wing, depending on the circumstances.
Is Selling Your House When You Have A Mortgage Complicated?
The details around payment timings, getting the title transferred at the correct moment etc. can be confusing for the first time home buyer, but fear not. Your real estate agent, loan officer, title company, and everyone else on your real estate team have done this plenty of time before. While it is important that you ensure everything that should happen has happened, and in the right order, it is the real estate professionals that do all of the work, so you don’t have to.
For example
Ahead of time, the title agent will ask for details of your mortgage lender, your mortgage account number, and your payoff amount. Once you have signed all of the paperwork at the closing meeting, the title agent sends off your final mortgage payment and then transfers the title to the new owner.
You know what’s coming though, right?
BUT
That doesn’t mean that selling your house when you have a mortgage is always straight forward. Most of the problems are associated with timing, especially in a market where there is high demand and buyers outnumber the homes available.
In these situations, lenders are reluctant to approve a new mortgage before a homeowner has their current house under contract. Obviously, if you have to wait until you have signed a sales contract for your current home before you can look for a new house, you can run into some tricky logistical problems.
Do I Have To Ask My Lender Before I Sell?
You do not need your mortgage lenders permission to sell, but you are obliged, by a point in your loan contract called the “Due On Sale” clause. As you can probably guess, this clause says that as soon as you complete the formalities of your property sale and the title and deeds are transferred to the new owner, your lender must be paid any amount you still owe.
Can I Sell My Mortgaged House If I’m In Negative Equity?
Yes, there is nothing to stop you selling your house if you have a mortgage and are in a position of negative equity. However, whether or not you should or would want to, is a different matter.
If you sell your home and have negative equity, you will not be able to pay off your mortgage from the proceeds of the sale and will still be required to pay the balance to the lender upon completion of the sale.
The Last Word
As a homeowner, there is nothing to stop you, in most situations, from selling your home while you still have a balance to pay on your mortgage. If you are considering this, first take the time to calculate how much money you will be left with after the sale, or if you’re unlucky, how much debt.
The sooner after taking out a mortgage you sell, the more likely it is that you will be left out of pocket and if you do find yourself in this situation, or if you sell while you have negative equity, you will be responsible for paying any outstanding balance, after you have used the proceeds of the sale, to the lender