I still remember the day we got the news: my husband had been offered a fantastic job opportunity in a new city, complete with better pay, better work-life balance, and a chance for us to experience a new adventure. It was perfect in every way—except one. We were only four years into a 30-year mortgage, and selling our home before it was paid off seemed daunting. We had questions: Can you sell a house before paying it off? How does the process work with a mortgage still in place? As we started researching, we discovered that not only is it possible to sell your home before the mortgage is fully paid off, but it’s something many homeowners do every day. This article will walk you through the process, explain how it works, and provide essential stats and tips to help you decide if selling before paying off your mortgage is right for you.
Can You Sell a House Before Paying Off the Mortgage?
The short answer is yes—you Can you sell a house before paying it off Most homeowners sell their homes with an existing mortgage balance. According to the National Association of Realtors (NAR), the average homeowner in the United States stays home for about eight years (1), far less than the typical 30-year mortgage term. That means the majority of home sales occur with an outstanding mortgage balance.
When you sell a home with a mortgage, the proceeds from the sale are used to pay off the remaining balance on your loan. The key to understanding the process lies in knowing your mortgage payoff amount, which is the total amount needed to pay off your loan, including any interest, until the day you close the sale. This differs slightly from the balance shown on your most recent mortgage statement, which doesn’t account for prorated interest or fees.
How Does the Process Work?
Selling a house before you’ve paid off your mortgage involves a few key steps. Here’s how it typically works:
- Determine Your Mortgage Payoff Amount
The first step is to contact your mortgage lender to request your payoff amount. This figure will include your outstanding principal balance, accrued interest, and any applicable fees or penalties for early repayment (if your mortgage has a prepayment penalty clause).
For example, if your remaining mortgage balance is $200,000 and you sell your house for $300,000, you would use part of the sale proceeds to pay off the mortgage and any fees. After that, you keep the remaining amount (minus closing costs and real estate agent commissions).
- List Your Home for Sale
Once you know your payoff amount, you’ll want to determine your home’s market value and list it for sale. It’s crucial to set a competitive price high enough to cover your outstanding mortgage, closing costs, and any realtor fees while leaving you with a profit (or at least breaking even).
- Accept an Offer and Go to Closing
After you’ve accepted an offer and moved forward with the sale, the title company or closing attorney will work directly with your mortgage lender to pay off the loan. At closing, the buyer’s funds are used to pay off your mortgage, and any remaining proceeds from the sale will go to you.
For example, if you sell your home for $400,000 and owe $250,000 on your mortgage, the first $250,000 from the sale goes to your lender to pay off the mortgage. The remaining amount is yours to keep after deducting closing costs, realtor commissions, and any other fees.
What Happens If Your Home Is Worth Less Than You Owe?
In some cases, homeowners may find themselves in a situation where their home is worth less than the remaining mortgage balance—a problem known as being “underwater” or having negative equity. This can happen due to falling property values, economic downturns, or buying a home with a meagre down payment.
If you find yourself in this situation, consider a short sale, which involves selling the home for less than the amount owed on the mortgage. In a short sale, your lender must agree to accept the sale proceeds as complete repayment of the loan, even if it’s less than the outstanding balance. Short sales can be complex and lengthy, but they allow homeowners to avoid foreclosure.
According to a CoreLogic report, in 2023, about 2.8% of U.S. homeowners were considered underwater, meaning they owed more on their mortgages than their homes were worth (2). While this is a small percentage, it’s essential to understand the options available if you’re in this situation.
The Costs of Selling Before Paying Off Your Mortgage
When you sell your home before the mortgage is paid off, there are several costs to consider beyond just the remaining loan balance. These include:
- Closing Costs
Closing costs typically range from 2-5% of the home’s sale price, depending on the location and complexity of the transaction. These costs include fees for title searches, home inspections, and recording the sale with the local government. If your home sells for $300,000, expect to pay between $6,000 and $15,000 in closing costs (3).
- Real Estate Agent Commission
If you’re using a real estate agent, their commission fee is typically around 5-6% of the sale price, which is split between the buyer’s and seller’s agents. For example, selling your home for $350,000 might pay $21,000 in agent commissions (at a 6% rate). While selling your house For Sale By Owner (FSBO) could save you money on commission fees, remember that FSBO sales often require more effort and may result in a lower sale price.
- Mortgage Prepayment Penalty
Some mortgages include a prepayment penalty, a fee charged if you pay off your loan early (before a certain period, such as five years). Prepayment penalties typically range from 1-2% of the loan balance. For example, if you have a $200,000 mortgage and a 2% prepayment penalty, you could owe $4,000 for paying off the loan early.
Before listing your home, check with your mortgage lender to see if your loan has a prepayment penalty and how much it might cost. Not all mortgages include these penalties, and many lenders have phased them out in recent years.
When Selling Before Paying Off Your Mortgage Makes Sense
There are several situations where selling a home before the mortgage is paid off makes financial sense:
- Relocation for Work or Family Reasons
Job relocations, growing families, or the need to downsize are common reasons why homeowners sell before their mortgage is fully paid off. If you’re relocating to a new city, selling your current home can free up the necessary funds to buy a new property in your new location.
- Market Conditions Are Favorable
If home values in your area have risen significantly, selling before paying off your mortgage can be brilliant. You could stand to make a substantial profit, even after paying off the remaining balance of your mortgage. For example, according to Zillow, the average home value in the U.S. increased by 18.8% from 2021 to 2022 (4), allowing many homeowners to sell at a much higher price than they originally paid.
- You Want to Access Your Equity
If you’ve built significant equity in your home (the difference between the home’s market value and what you owe on the mortgage), selling before your mortgage is paid off allows you to access that equity. Many homeowners use this equity for other investments, paying off debts, or purchasing a new home.
Tips for Selling Your Home Before Paying Off the Mortgage
If you’re considering selling your home before paying off your mortgage, here are some tips to ensure a smooth transaction:
- Know Your Break-Even Point
Before listing your home, calculate your break-even point—the sale price you need to cover your remaining mortgage balance, closing costs, realtor fees, and any prepayment penalties. Knowing this figure will help you price your home appropriately and avoid losing money in the sale.
- Work With a Real Estate Agent
While selling your home on your own might save you on commission fees, working with an experienced real estate agent can help you price your home accurately, attract more buyers, and navigate the complexities of selling with a mortgage. Agents also handle negotiations and paperwork, making the process smoother.
- Plan Your Next Move
If you’re selling your home to purchase a new one, ensure you’ve thought through your next steps. You might need the proceeds from your sale to use as a down payment on your new home, so carefully timing your sale and purchase is essential.
Conclusion: Selling a Home Before Paying Off the Mortgage is Common—and Doable
Selling a home before paying off your mortgage is not only possible, but it’s also quite common. Most homeowners must stay longer to pay a 30-year mortgage, and life changes often prompt people to sell early. As long as the sale price of your home covers your mortgage balance, closing costs, and any fees, you can move forward with the sale without any issues.
Whether relocating, upsizing, downsizing, or simply taking advantage of a favourable market, selling before paying off your mortgage can be an intelligent financial decision. Ensure you understand your payoff amount, factor in any costs, and plan to make the transition as smooth as possible.
