Selling Your House With a Mortgage
While the process can be more complicated, it’s certainly possible. We tell you how.
By Emily Southey | 13 minute read
Looking to sell your house but still have a mortgage on it? Your options will range depending on the terms of your mortgage. While it’s certainly possible to sell a home with a mortgage, the process can be a bit more complex. Continue reading to learn all about how selling a home with a mortgage works.
Can You Sell a Home With a Mortgage?
First off, you may be wondering if selling a home with a mortgage is even possible. The good news is yes, you can sell your home even if you have yet to pay off your mortgage. In fact, selling a property that still has a mortgage on it is extremely common. (Keep in mind that mortgage terms last a long time, and many homeowners do not stay in their homes long enough to pay off the entire loan). The benefit of selling your home with a mortgage is that doing so allows you to use your equity to pay off the rest of the loan, along with your share of any closing costs associated with the home sale. That said, prepayment penalties may apply depending on the terms of your current mortgage (more on that below).
Ultimately, if you still have a mortgage but are thinking of selling your home, we recommend contacting your mortgage lender as soon as possible. They can inform you of your current mortgage payoff amount (which is often valid for between 10 days and 30 days). Confirming your outstanding loan balance can help you determine the ideal selling price of your home, as you want to be able to use the profits from the home sale to pay off your mortgage loan. At this point, we also suggest reviewing the terms of your mortgage by reading through your mortgage loan paperwork. Specifically, keep your eyes peeled for a due-on-sale clause, which protects lenders by requiring homeowners to pay their mortgage loans in full after selling their properties (or transferring their house deeds to another party). Please note that not all mortgages have a due-on-sale clause, but many do, so it’s important to check in advance.
Finally, although the loan contract with your lender may contain certain conditions about the sale of your home, your lender will not have a significant role in the home-selling process. They may request information about the buyer’s mortgage lender but typically, they do not get a say in who you sell your home to. This means that as long as you abide by the terms and conditions of your existing mortgage loan agreement, you should have no trouble selling your home with a mortgage.
Mortgage Prepayment Penalties
Depending on how you decide to sell your home with a mortgage, you may be required to pay prepayment penalties to your mortgage lender. Prepayment penalties are typically charged to borrowers who break their mortgage contracts early. These fees can be expensive, especially if your mortgage term is still in its early stages. It’s also important to note that not all prepayment penalties are the same. Rather, they vary from lender to lender, which is why it’s so important to contact your lender before you start the process of selling your home to determine what these fees will amount to. We also recommend learning about early payout penalties before signing a mortgage contract in the first place. Most fixed-rate mortgages have prepayment penalties that add up to either three months’ worth of interest or the interest rate differential (IRD). The latter is calculated based on the amount that is being prepaid, as well as the difference between your existing interest rate and the mortgage lender’s current interest rate. Meanwhile, most variable-rate mortgage penalties are free from IRD penalties, amounting to three months’ worth of mortgage interest in total.
Three Options for Selling a House With a Mortgage
Selling a home is certainly an exciting prospect, but if you still have a mortgage on your house then one of the first steps is to figure out what to do with it. Although paying off your mortgage through the home sale is the most common way of selling a house with a mortgage, it isn’t the only option. Below, we break down the three most popular options when it comes to selling a home with a mortgage: paying off your mortgage, porting your mortgage, or having the buyer assume the mortgage.
“Depending on how you decide to sell your home with a mortgage, you may be required to pay prepayment penalties to your mortgage lender. “
Option 1: Pay Off Your Mortgage
The first option is to pay off your mortgage outright. This can be a great option for homeowners with an open mortgage (for example, one that is free from prepayment penalties). Generally speaking, this option may not be available to everyone, especially if the outstanding balance is significant. But if the remaining balance is small or you don’t plan on purchasing another property after selling your existing one, paying off your mortgage in its entirety might be the simplest, most convenient option.
Option 2: Port Your Mortgage
The second option is to port your mortgage. Porting a mortgage is the process of transferring it to another property that you are buying. If you choose this option, you can leave your mortgage as is (for example, the same interest rates and terms). Alternatively, if you need to increase or decrease the amount of the existing mortgage to reflect the costs of your new home, you can speak to your mortgage lender about refinancing. This is a great option if the home you are buying costs more than the one you’re selling. That said, if interest rates at the time of your move are high, this option may not be the best. Most homeowners only port their mortgages if they have a great interest rate with their current mortgage lender or if they want to avoid hefty prepayment penalties. Porting a mortgage ultimately means that both parties agree to maintain their relationship but sign the mortgage over to a new property. If you decide not to port your mortgage, but your mortgage still has an outstanding balance on it, you will need to break your contract with your current lender and pay whatever penalties come along.
It’s important to note that the property you’re buying will still need to be approved and appraised. Not every borrower or every property will qualify for this option. For example, borrowers with variable-rate mortgages may not have the option to port. Porting will also be unavailable to anyone who does not meet the requirements for approval on a new mortgage. To qualify for porting your mortgage, you will need to reapply and meet the current lending criteria (that is, you will need to prove that you can afford to pay back your loan should interest rates rise). Unless the borrower can prove that they can handle the financial stress of a rate increase, they will not be approved.
Option 3: Buyer Assumes Your Mortgage
The third option when selling your home with a mortgage is to allow the buyer to assume the mortgage. This practice is less common but when interest rates are low, it can be a great option. In fact, when a seller has a low-interest mortgage, marketing the mortgage along with the property sale can be a selling point, making your home more attractive to potential buyers. Not only can assuming your mortgage be beneficial to a buyer, but it will also be beneficial to you, as it will allow you to get out of your current mortgage contract without breaking the contract (and having to pay the obligatory prepayment fees).
As you can see, sellers have several options when it comes to selling their homes with a mortgage. If you aren’t sure which is right for you, speak with a mortgage lender or broker directly who can offer their professional opinion on which option will be most beneficial.
Preparing to Sell a Home With a Mortgage
Ready to sell your home with a mortgage? Start preparing by obtaining a payoff quote, calculating your home equity, and deciding between your options.
Obtain a payoff quote from your mortgage lender
If you’re thinking of discharging your mortgage, reach out to your mortgage lender for a discharge or payoff quote. This is the amount of money that must be paid in order to have no further loan obligations. Typical payoff quotes include several important pieces of information, such as the total outstanding balance on the loan, as well as a breakdown of any fees being charged. This quote will also list the date on which it expires (which is usually between 10 and 30 days from the date it’s requested), as well as the interest that will be due between the date of the quote and the expiration date. Ultimately, a payoff quote will reveal the total amount of money you will need to pay to settle your mortgage loan, which as you can see, will be more than simply the outstanding balance of the loan. Keep in mind that if you still have mortgage insurance on the loan, you will need to pay that off as well.
Calculate your home equity
The next step is to calculate your home equity. Why is this important? Because you can use your home equity to help pay off your outstanding mortgage balance, along with any closing costs. Home equity is the difference between the market value of your home and the outstanding mortgage balance you have left on your property (in addition to any other liens against it). There are two main ways that a homeowner can gain equity: earned equity and home investment equity.
- Earned equity: Earned equity is gained when you make your mortgage payments each month. With every mortgage payment you make, you pay off a little more of your principal. At the beginning of the loan, more of the money you pay toward it goes to interest, but that later flips and more money goes toward the principal (directly bringing down your mortgage balance and increasing your home equity).
- Home investment equity: The second way to gain equity is through home investment equity. This type of equity fluctuates with the value of your home. It is based on market conditions and the perceived value of your home relative to that of comparable properties in your area. Since home investment equity is dependent on market value, you may end up with more or less equity than you would if it were based on your mortgage payment alone. Ultimately, the total home equity you have is the sum of your earned equity and your home investment equity.–
Decide between your options
As mentioned above, sellers may have several options when selling a home with a mortgage. From paying off the mortgage in its entirety to porting it to having a buyer assume the mortgage, you will need to decide which option is right for you. To do this, make sure to contact your mortgage lender who can not only outline the terms and conditions of your existing loan but can offer a professional opinion on the best course of action for you.
Four Steps to Selling a Home With a Mortgage
If you’re ready to sell your home with a mortgage, follow the step-by-step guide below. We outline the process of selling a home with a mortgage using the most common method — selling your home and using the proceeds of the sale to pay off the mortgage.
1. Use the money from the sale to pay off your mortgage
If you have a mortgage on the home you are selling, it is referred to as a first or primary lien. This means that once the home is sold, the mortgage is the first thing that must be paid off. Therefore, the money you make from the sale will go directly to your mortgage lender to pay off your remaining mortgage balance.
2. Pay off any additional loans or liens
Once the mortgage is taken care of, it’s time to pay off any other outstanding loans or liens on the property. These could include other lending products like home equity loans or home equity lines of credit (HELOCs). Any other liens should also be paid off, such as tax liens.
3. Pay your portion of closing costs and transaction fees
Next, the seller is responsible for paying their portion of any closing costs and transaction fees, such as realtor commissions, deed recording fees, or real estate attorney fees. Ultimately, closing fees will vary from transaction to transaction as they can be negotiated, so it will depend on the terms of the purchase agreement agreed to by the buyer and seller.
4. The seller keeps the remaining funds
The final step of the home-selling process is the best one yet — the seller gets to keep the remaining funds from the sale. After you have paid off your mortgage, loans, liens, and closing costs, everything that’s left is for you to keep. This leftover amount is typically used for a down payment if you plan on buying another property, however, it can be used in any way you wish.
Tips on Saving Money When Selling a House With a Mortgage
As you now know, selling a house with a mortgage is certainly possible. However, it can be costly, especially if your mortgage lender charges hefty prepayment penalties. Therefore, most borrowers want to do everything they can to keep costs down when selling their homes with a mortgage. Below, the experts at Wahi outline a few tips on how to save money when selling a house with a mortgage in Canada.
- Speak with a mortgage broker: Contact a trusted mortgage broker near you to receive expert advice on how to proceed with selling your home with a mortgage. Mortgage brokers work independently of mortgage lenders and can provide objective, unbiased advice on what to do next.
- Know how much you will owe in fees and save for them: Knowledge is power, so the earlier you find out how much money you will owe in fees and penalties for breaking your mortgage, the better. Contact your mortgage lender to clarify the terms and look for a due-on-sale clause in your loan contract. From there, you can assess your financial situation to determine if you can afford to break your contract. This can help you decide if selling your home at this point in time is right for you.
- Search for better rates: Finally, if you decide to proceed with selling your home, don’t put more financial stress on yourself by buying a more expensive home or signing a new mortgage contract with higher interest rates. Only purchase what you can afford. Working with a broker can help ensure you find the best possible mortgage rate for your new home.
Frequently Asked Questions
Is the process of selling your home with a mortgage the same in Ontario as in other provinces?
The process of selling a home with a mortgage in Ontario is comparable to other provinces. Most mortgage loans have prepayment penalties if you decide to break your contract early. However, the best way to learn about the process of selling a home with a mortgage is to contact your mortgage lender directly.
Does an existing mortgage prolong the time of selling a house?
Having an existing mortgage on a home is extremely common during the selling process. Therefore, it usually does not prolong the time it takes to sell a house. After all, while you’re using the money from the sale to pay off your mortgage loan, the buyer likely also needs time to have their mortgage loan application approved.
Should you sell your house with a mortgage if your mortgage just started a year ago?
You can sell your house with a mortgage even if your mortgage loan just started, however, it may be expensive to do so. Breaking a mortgage contract can result in hefty prepayment fees, and these fees are likely to be higher the earlier that you break your contract. That said, there might be certain situations in which selling your house with a mortgage that started a year ago is the best decision. If you are in a financial position to pay these high fees and penalties, you can certainly do so. To determine exactly how much you would owe if you decided to pay off your mortgage early, request a payoff quote from your mortgage lender. From there, you can determine if selling your house so soon after buying it is a viable option for you financially.