You’ve decided to take the plunge and sell you home. More than a few people have innocently asked me, “What happens to my mortgage when I sell my home?” And hey, that's a very legitimate question! You don't want to be homeless and find out later on that you still owe a ton of money on your mortgage. Now, that wouldn't be such a great position to be in, would it?
If you own a home, you are most likely carrying a mortgage on it. A mortgage is simply a loan from a bank or financial institution for percentage of the value of the home, which you pay to the person you purchased the home from when you bought it. Depending on the type of mortgage you have, the amount due on the loan should have decreased during the time you lived in the home and made monthly payments.
When you go to sell your home, the simple question is what happens to the then due balance on the mortgage? The simple answer is the financial institution is going to be paid out of the proceeds of the sale before you see anything. As a result, it is critical that you calculate in the loan repayment amount when determining if it makes sense to sell a home. If you have a home worth $300,000 and owe $280,000 on the mortgage, you are going to realize little or no profit after the costs associated with the sale and probably shouldn’t sell it.
If you have plenty of equity built up in the home, your mortgage can still end up costing you more than you originally expected. Many modern mortgages have restrictive penalties built into them. These penalties are designed to encourage you to hold onto the home for a set period of time, usually a couple of years, so the bank can recover a certain amount of interest up front. Put another way, the bank is trying to lock in a certain amount of profit on the loan.
When it comes to these restrictive penalties, lending institutions get pretty creative. Many will include a penalty if you sell or refinance the property within the first two years of the loan period. The penalties can be anything from the equivalent of three months of payments to a preset amount or even a percentage of the loan. State law often influences these issues, so you need to read your mortgage loan documents closely.
Regardless, you mortgage is going to be paid off as part of the sales process. The exact amount will depend upon the nature of your loan.