So you used the equity on your house to pay off those student loans, or on your kitchen remodel, or something else that you had to take care of, and now you have a second mortgage to worry about when selling your home. We get it, the thought of selling while having that second mortgage seems daunting, but it isn’t impossible. Below we have outlined some vital tips you can follow to make the process of selling that home a little less ominous.
COMMON TYPES OF SECOND MORTGAGES
Equity is a great plus when it comes to owning a home. Not only does this amount build up over time, but you can make the decision to take it out and use it for something needed. When it comes to borrowing against your home via the equity, there are two main types:
-Home Equity Loans: This method will pull the equity from your home as a one-time lump sum and you pay it back monthly with interest just like your regular mortgage. The amount of time given to pay it back ranges from 5-30 years.
-Home Equity Line of Credit (HELOC): Instead of a lump sum, the lender will approve you for a line of credit and give you a limit much like a credit card, except with lower interest rates. It is typically divided into two phases, the draw period and repayment period. The amount of time for each depends on what the set agreement is between you and the lender.
RUN SOME NUMBERS – IS IT THE RIGHT TIME?
Regardless of how you look at it, a second mortgage is collateral on your house. It has its benefits, but it also has its drawbacks. When selling your home, you have to factor in everything and decide if your profit will outweigh everything else and if it’s enough for your next home. For example, let’s say that your home appraises for $150,000, your first mortgage has $70,000 left and your second mortgage has $30,000 left. This means you would see a net profit of $50,000. If this is enough for you to take the next step in life, go for it, but if you need to get $60,000 from the sale, it may not be the best time to sell.
Make sure when calculating that you look at the “payoff amount” for the loans rather than the current balance. This will give you more accurate numbers. Enlist the help of a real estate agent to help you make this decision, and help you make an accurate calculation. They can give you great insight and make it less overwhelming.
CHECK INTO ANY PREPAYMENT PENALTIES WITH YOUR LENDER
A prepayment penalty is a fee charged to you when you pay back part or all of the loan early. Majority of mortgages don’t have this, but they do exist, so double check if your loan includes this, and then factor that amount into your calculations for your net profit..
PAY OFF BOTH MORTGAGES AT THE TIME OF THE SALE
To make the process go faster, also provide documentation of your second mortgage up front to your real estate agent or title company. Theoretically, the sale of your home should pay off both mortgages, and you get the balance left over. That second mortgage will of course, eat away at the profit, but however, as long as it pays it off, you are in the clear. Let’s say you’re in a situation that you’re unable to pay back the second mortgage at the close of the home sale. There are options available.
REVIEW OPTIONS IF YOU CAN’T PAY BACK THE SECOND MORTGAGE DEBT
In this case, find a way to cover the cost another way, whether that’s through investments, savings, etc, or you can do a short sale. During a short sale, you provide documentation to the lender that you’re unable to pay and they agree to allow you to pay less than what you owe. This route is not ideal because it takes a hit to your credit.
So there you have it. Selling your home with a second mortgage isn’t impossible, and with the right agent, it can go smoothly!