Are you thinking about selling your house? If you haven’t gone through the process before, you should know that it’s a major financial event with many moving parts. One of the most important things to understand is what will happen to your mortgage when you sell. We’re going to break that down for you right now.
The Exchange of Money
There are several different situations that can arise when selling a house. Typically speaking, people take out a mortgage when they buy a house. They then make regular payments on that mortgage and eventually pay it down. You know this already, but this is what sets the stage for the exchange of money when you sell. How much of the mortgage you owe at the time of selling will be the biggest determining factor in what happens when you sell a house.
Equity vs. Lien
There’s an old saying that until you pay off the mortgage, the bank owns your house. While the sentiment is understandable, the saying isn’t technically true. Instead, lenders use what is called a lien. Basically, this means that they have the right to sell your house if you default on your mortgage. Getting to that point takes time, and until you’re in default, the bank doesn’t own anything. You own the house. You just owe the bank money.
So, as soon as you close on the house you’re buying, you completely own it. Whatever the house is worth is completely yours. You just also owe the bank whatever you borrowed from them.
This is what brings us to the concept of equity. Equity is a way of comparing the value of the house to the total of the mortgage. If you take however much you can get from selling a house and subtract whatever is left on the mortgage, the remaining amount is your equity. It’s the total amount of money that will be in your pocket when everything is done. As you make payments on your mortgage, the amount you still owe goes down, and that means your equity goes up.
Knowing this, what does the actual process of selling look like?
Balancing the Ledger
The first step in balancing the ledger is to ask your bank what your payoff amount is. This will be the total amount remaining on the mortgage plus any fees. It will not include interest because you won’t owe any additional interest when you fully pay off the loan. As for the fees, they can include early payment fees, processing fees, and a few others that show up sometimes (like title processing or appraisal). The combined total number you get from the bank (again, called the payoff amount) is what you will owe the bank when you finalize the sale of your house. This helps you figure out a minimum asking price.
If you sell the house for more than your payoff amount (which is the most common scenario), then you use the money from the sale to completely close out with the bank. This means paying every last dime of that payoff amount. Once that is done, you get a check for whatever equity you had in the house. Part of the processing fees that you pay turn this into a single transaction on your end. Everything goes through the bank, so you just get a check when it’s all said and done.
If you sell the house for less than your payoff amount, you won’t get a check when you’re done. Additionally, you’ll still have to make payments on whatever is left of your loan. Before committing to this, you should be able to get a total breakdown of costs and payments from the bank. You can also explore alternative options, one of which is covered next.
If you owe more than you can get for the house, you can look into a short sale. The basic idea is that you negotiate with your lender to see whether they’ll accept a short sale. In this agreement, they get 100% of the money from selling the house (sometimes minus some of the closing costs), and then they forgive the loan. It ultimately means that you’re getting out of your mortgage for less than you owe, but it also means that you walk away with nothing when the transactions are done. It can be beneficial in situations where a property significantly depreciates. That said, a short sale is more complicated and can make it harder to get a final sale approved.
That’s really it. Banks, title companies, and third parties handle the paperwork and logistics of everything. What is most important for you to know as a seller is that you are legally obligated to pay the mortgage with the proceeds of the sale before the money can go anywhere else. That’s true even if you sell the house for cash, which is a simplified case you should consider. Purple Mountain Holdings is a cash property buyer in Colorado Springs. Contact us to see what some of your options are.