Selling a home with a home equity loan or HELOC

Written by Samantha SheltonNMLS 1647301Updated October 2026

This article is general information about lien payoffs and closing mechanics, not legal or tax advice. Loan terms, fees and state procedures vary. Consult a Michigan real estate attorney and a qualified tax professional about your situation.

Yes, you can sell a home with a home equity loan or a HELOC attached to it, and in most cases you never pay the balance off in advance. Federal law gives your servicer no more than 7 business days to deliver an accurate payoff statement after it receives a written request, and the title company uses that figure to retire the loan out of your sale proceeds on closing day.

The money leaves the closing table in a fixed order. Selling costs and prorations come off the top, then liens are paid in the order they were recorded: the first mortgage, then the home equity loan or HELOC, then any judgment, tax or construction lien. Whatever survives that sequence is your net.

Two things bite sellers. Home equity lines commonly carry a cancellation fee when the line is closed inside the first two or three years, and if your combined balances exceed what the sale brings, you either bring cash to closing or negotiate a short sale. Learn how the payoff order works, what a second lien costs you at closing, and how to plan the net before you list. If you’re earlier in the process, start with our Selling a Home guide.

Key takeaways:

• Liens are paid in recorded order: Selling costs come off first, then the first mortgage, then the home equity loan or HELOC, then junior liens, and your servicer must send an accurate payoff statement within 7 business days of a written request.
• Closing the line early can cost money: Cancellation fees typically apply when a HELOC is terminated within the first two or three years, and Michigan sellers separately owe real estate transfer tax of $8.60 per $1,000 of sale price before any payoff is calculated.
• Second liens are common, so plan the net: U.S. HELOC balances hit $459 billion at the end of June 2026, about $142 billion above their early-2022 low. Get written payoff quotes from every lienholder and a current market analysis before you sign a listing agreement.

Can you sell a house with a home equity loan on it?

Yes, and it happens every day. A home equity loan or HELOC is a second lien against the same property your first mortgage already encumbers, and liens are routinely satisfied out of sale proceeds at closing rather than in advance. You are not transferring the debt to the buyer or being penalized for selling. You are clearing title so the deed can convey.

The two products behave differently in the payoff, so it helps to know which one you have.

• Home equity loan: A closed-end second mortgage. You borrowed a lump sum and have been amortizing it, so the payoff is a known, shrinking number. Our breakdown of home equity loan pros and cons covers how these are structured.
• HELOC: An open-end revolving line. The CFPB describes a draw period that could last 10 years, followed by a repayment period a lender may schedule over 10 or 20 years. Because the balance moves, the payoff figure is only good through a stated date. See how a HELOC works for the mechanics.

That moving balance is the practical difference at closing. A HELOC with room on it can be drawn against after the payoff statement is issued, which breaks the number the title company wired. Ask your servicer in writing to freeze the line and close the account as part of the payoff, and stop using the card or checks the day you list.

Which loan gets paid first when you sell?

The one recorded first. Michigan is a race-notice state: an unrecorded conveyance is void against a later good-faith purchaser for value whose interest is recorded first. The register of deeds sets the order, not the size of the balance or the lender. Your first mortgage was recorded before your home equity loan, so it is paid first.

That ordering applies only to what is left after the transaction pays for itself. On the settlement statement, commissions, transfer tax, title charges, closing fees and prorated property taxes come off the sale price first, and lien payoffs come out of the remainder. For background on the mechanics, the American Land Title Association, the title industry’s trade association, publishes consumer material on how title companies handle lien payoffs at closing.

Junior liens you may have forgotten sit behind the HELOC and still have to clear: delinquent property taxes, a recorded judgment lien, a contractor’s claim under Michigan’s Construction Lien Act, or unpaid association assessments. They do not travel to the buyer. Our guide to selling a home with a lien on it goes through each type and how it gets released.

You will see the arithmetic before you sign: the settlement agent must give the seller the closing disclosures for the seller’s side of the transaction no later than the day of consummation. Build your own seller’s net sheet weeks earlier so nothing on that page is a surprise.

What the payoff waterfall looks like in dollars

Take a $325,000 Michigan sale with a $210,000 first mortgage and a $45,000 HELOC. Michigan’s real estate transfer tax falls on the seller at $3.75 per $500 of value for the state portion and 55 cents per $500 for the county portion in counties under 2 million population, which is $8.60 per $1,000 combined, or $2,795 here. Commission is negotiable and is illustrative only.¹

Notice what the second lien actually did. It did not penalize the sale. It moved $45,000 of equity from your side of the ledger to the lender’s, plus $500 for closing the line early. That is why the payoff quote belongs on your net sheet the week you decide to sell, not the week you close.

Does paying off a HELOC at closing change your taxes?

No, and this is where sellers most often miscalculate. The IRS figures your gain from the selling price minus selling expenses, then minus your adjusted basis. Retiring a mortgage or a home equity loan out of the proceeds is a debt being satisfied, not a selling expense, so a large payoff shrinks your check without shrinking your taxable gain by a dollar.²

For most sellers the exclusion absorbs the gain anyway. You may exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly, if you owned the home at least 24 months out of the 5 years before the sale, used it as your residence at least 24 months of those 5 years, and meet the look-back requirement. IRS Publication 523 walks through the eligibility test and the gain worksheet.

The exclusion attaches to a main home, so a second property with a line against it deserves its own conversation. Our guide to selling a vacation home covers what changes when the property was never your primary residence. Ask a tax professional before relying on the arithmetic.

Do you pay a penalty for paying off a home equity loan early?

Sometimes, and it depends on whether your product is closed-end or open-end. True prepayment penalties on closed-end mortgages are tightly restricted: federal rules allow one only on a qualified mortgage that is not higher-priced and whose rate cannot increase, cap it at 2% of the amount prepaid in the first 2 years and 1% in the third year, and prohibit it after 3 years. Most home equity loans written today carry none.

HELOCs fall under the open-end rules instead, and the charge there is a cancellation or early-termination fee. The CFPB describes it as a fee for terminating the HELOC early, usually within the first two or three years. It generally reimburses closing costs the lender waived at origination rather than penalizing the sale. See the CFPB on prepayment and early-closure fees for the consumer-facing version.

• Get the quote in writing: Your servicer has no more than 7 business days to send an accurate payoff statement after a written request, with narrow exceptions for bankruptcy, foreclosure and similar circumstances. Ask for a good-through date past your target closing.
• Read your own fee schedule: The cancellation fee, any annual fee, and the costs the lender waived are all in the documents you signed. The amount and the trigger window are lender-specific, so find yours instead of assuming a range.
• Confirm the discharge is recorded: Under MCL 565.41 the mortgagee must prepare the discharge, file it with the register of deeds and pay the recording fee within 60 days of satisfaction. If it refuses or neglects after you request the discharge and tender its reasonable charges, MCL 565.44 makes it liable for $1,000 plus your actual damages. Pull the record afterward and verify the release is on file.

What if you owe more than the home is worth?

You have three moves, and only one is fast. Bring the shortfall to closing in certified funds, negotiate a short sale in which both lienholders accept less than full payoff, or take the home off the market and pay the balances down. Written payoff quotes plus a current comparative market analysis tell you which situation you are actually in.

The short sale route needs care. The CFPB is direct: if your lender agrees to a short sale you may be able to sell even though proceeds fall short of the balance, but in a state where you are responsible for a deficiency, the lender could later sue to collect it. Ask for a written waiver of deficiency before closing and keep it. With two lienholders you need both to sign off, and the junior one has the least to gain from cooperating, which is what stalls these files.

Bring in a Michigan real estate attorney here rather than a national template, because deficiency exposure, release language and the tax treatment of forgiven debt are all situation-specific. Model the outcome first with our walkthrough of the finances of selling, and see our overview of selling situations for the neighboring scenarios.

How to prepare the sale so the payoffs go smoothly

Start 30 to 60 days before you list, because every item below takes longer than sellers expect.

• Order a title search first: Old liens, not the HELOC, are what kill these closings. A search surfaces judgment liens, tax delinquencies and second mortgages that were paid but never discharged.
• Stop drawing on the line: Every dollar drawn after you list is a dollar off your net, and a draw after the payoff figure is issued forces a revised statement and can delay funding.
• Disclose what the money built: Michigan’s Seller Disclosure Act applies to transfers of one to four residential dwelling units, and an “as-is” clause does not waive the duty to disclose known defects. Unpermitted work and pre-1978 lead disclosure obligations do not disappear because a buyer waived an inspection.
• Fix what buyers notice: Condition drives the price that drives your net. If animals lived in the home, selling a home with pets covers the odor, flooring and yard issues buyers flag first.
• Treat commission as negotiable: Since August 17, 2024, offers of buyer-agent compensation cannot be communicated through an MLS and buyer agents must have written agreements before touring. There is no standard rate to accept.

What the payoff means for your next mortgage

It usually helps you. Clearing both liens at closing removes two monthly obligations from your debt-to-income ratio, and the net proceeds become the down payment on the next home. The sequencing is the hard part, not the qualifying, and that is the part Align Lending works on.

Align is a mortgage broker, not a listing brokerage and not a law firm. We do not sell your house. We model what the sale nets with both payoffs in it, underwrite the next purchase against that number, and where the closings do not line up we price bridge financing so your offer is not contingent on a sale that has not happened. Proceeds are disbursed by the settlement agent rather than handed over instantly, so read when a seller gets money after closing before committing to a purchase date.

FAQ: Selling a home with a home equity loan

Here are answers to common questions about selling a home with a home equity loan or HELOC.

Can I transfer my home equity loan to the buyer?

No. A home equity loan or HELOC is your personal obligation secured by that specific property, and it is satisfied and released at closing so the deed can convey clean title. The buyer takes the home free of your liens and arranges their own financing. If the buyer wants to tap equity later, our explainer on how a HELOC works covers what that would take.

Who orders the payoff statements, me or the title company?

Both, and you should not wait for the title company. The 7-business-day rule runs on a written request from you or anyone acting on your behalf, so pull your own quotes before listing and let the closing agent order official figures again closer to the date. That early copy is what makes your net sheet real. Our guide to selling a home with a lien covers what else the title search should turn up.

Should I pay off my HELOC before I list the house?

Usually no. Paying it off early with other savings does not increase your net at closing, and if the line is under three years old you may owe the same cancellation fee either way. The exception is a small balance you want off your debt-to-income ratio before applying for the next mortgage. Run both versions on a seller’s net sheet before you move any cash.

Will a home equity loan affect buying my next home?

Only until it is paid. Underwriters count the payment against your debt-to-income ratio while it exists, but a payoff documented on the settlement statement removes it, and the proceeds usually strengthen the new file as down payment. The wrinkle is timing when you buy before you sell. Our guide to using home equity wisely weighs selling against keeping the line open.

The bottom line on selling a home with a home equity loan

Selling a home with a home equity loan or HELOC is an ordinary transaction with one extra payoff in it. Request written payoff quotes from every lienholder, remembering your servicer has no more than 7 business days to respond to a written request, freeze and close the line so the balance cannot move, and expect the money to leave in order: selling costs, then the first mortgage, then the equity loan, then junior liens, with the remainder to you. Budget for a cancellation fee if the line is under three years old, and confirm the discharge is recorded.

If you’re ready to see what the sale actually nets and what it buys next, talk to Align Lending. We’ll build the net sheet with both payoffs in it, shop your next mortgage across our lender network, and show you the numbers side by side. Call 248-506-5727 or start online today. For lien disputes, short-sale approvals or deficiency questions, work with a Michigan real estate attorney.

Footnotes:

1. Example figures are hypothetical and for educational purposes only. They do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Real estate commissions are negotiable and are illustrated here only to show the order of deductions; title, settlement and proration amounts vary by county, closing agent and contract. Your actual payoffs, fees and net proceeds will depend on your loan documents, your purchase agreement and market conditions. Return to text.

2. This is general information, not tax advice. Adjusted basis, deductible selling expenses, eligibility for the home sale exclusion, the treatment of forgiven debt in a short sale, and the rules that apply to a property that was not your main home all depend on your individual circumstances. Consult a qualified tax professional about your situation. Return to text.

Sources: requirement that a creditor, assignee or servicer provide an accurate payoff statement within a reasonable time and in no case more than seven business days after a written request from the consumer or any person acting on behalf of the consumer, with exceptions for bankruptcy, foreclosure, reverse and shared appreciation mortgages and similar circumstances, 12 CFR 1026.36(c)(3). Prepayment penalty conditions and the caps of 2% of the amount prepaid in the first 2 years, 1% in the third year, and none thereafter, 12 CFR 1026.43(g); “What is a prepayment penalty?”, Consumer Financial Protection Bureau. HELOC cancellation fee described as a fee for terminating the HELOC early, usually within the first two or three years, “What fees can my lender charge if I take out a HELOC?”, Consumer Financial Protection Bureau. HELOC draw period that could last 10 years and a repayment schedule often set over ten or 20 years, “What is a home equity line of credit (HELOC)?”, Consumer Financial Protection Bureau. Short sale mechanics, state-dependent deficiency exposure and the recommendation to obtain a written waiver of deficiency, “What is a short sale?”, Consumer Financial Protection Bureau. Requirement that the settlement agent provide the seller the disclosures relating to the seller’s transaction no later than the day of consummation, 12 CFR 1026.19(f)(4)(i) and (ii). Michigan recording act voiding an unrecorded conveyance against a subsequent purchaser in good faith and for valuable consideration whose conveyance is first duly recorded, MCL 565.29. State real estate transfer tax of $3.75 for each $500.00 or fraction of $500.00 of total value, MCL 207.525; State Real Estate Transfer Tax Act, 1993 PA 330, MCL 207.521 et seq. County real estate transfer tax of 55 cents for each $500.00 or fraction thereof in a county with a population of less than 2,000,000, MCL 207.504; MCL 207.501 et seq. Combined rate of $8.60 per $1,000 and imposition of the tax on the seller or grantor, Michigan county register of deeds transfer tax schedules. Duty of the mortgagee to prepare a discharge, file it with the register of deeds and pay the recording fee within the applicable period after satisfaction, MCL 565.41; 60-day period, and liability of $1,000.00 in damages plus all actual damages where the mortgagee, after being requested and after tender of its reasonable charges, refuses or neglects to discharge, MCL 565.44(1) and (2)(b). Michigan Construction Lien Act, 1980 PA 497, MCL 570.1101 et seq. Michigan Seller Disclosure Act coverage of transfers of 1 to 4 residential dwelling units, MCL 565.951 et seq. Lead hazard pamphlet, disclosure of known lead-based paint and hazards, and the 10-day inspection opportunity for pre-1978 target housing, 42 U.S.C. 4852d. Maximum exclusion of $250,000 of gain, or $500,000 for a married couple filing jointly; the 24-months-of-5-years ownership and residence requirements and the look-back requirement; and the calculation of amount realized as selling price minus selling expenses, IRS Publication 523. Home equity line of credit balances of $459 billion at the end of June 2026, an increase of $13 billion in the quarter and approximately $142 billion above the low reached in the first quarter of 2022, Quarterly Report on Household Debt and Credit, Federal Reserve Bank of New York, August 2026. Owner’s title insurance and how title companies clear liens at closing, American Land Title Association. Prohibition on communicating offers of compensation through a multiple listing service and the written buyer agreement requirement effective August 17, 2024, National Association of REALTORS®.

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Loan terms, cancellation and prepayment fees, lien priority rules, transfer tax rates and statutory deadlines change and vary by lender, state and county; confirm your figures with your servicer’s written payoff statement, your closing agent, a Michigan real estate attorney and a qualified tax professional. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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