What happens to my mortgage when I sell a home?
Selling a home can come with a multitude of questions for the seller. Most home sellers are concerned with what their net profit will be once the house is sold; many also wonder what happens to the mortgage that they have on the property.
A mortgage payment is built up of three parts: the principal (used to build equity in the property), the interest and the escrow account. When selling a home, the most important thing is the amount of the principal balance. Over time, a homeowner will decrease the principal amount while property values increase, helping the owner build equity when he sells the property.
There are three basic mortgage types: FHA, VA and conventional. Each type of mortgage, however, has the same basic rules for paying it off upon successful sale. The charges will differ from one lending institution to another. For example, the amount a bank charges to pay off the mortgage can range from a few hundred dollars to a few thousand.
Having a Home Under Contract
When selling a home, the first step after a successful offer is acceptance of the contract. At this point, the paperwork goes to the title company. The title company acts as a disinterested third party and coordinates the closing and transfer of the property from one owner to the next.
Ordering the Payoff
The title company will collect information from the home seller to get the payoff information from the lender. The lender will send a statement of account reflecting the owner's balance on the home, and will include any prepayment charges. The statement of account is then provided to the home seller for review, and it is at this point any discrepancy between the homeowners' records and the lender's records can be contested.
Once the new buyer has signed off on the closing paperwork, and the seller has signed her part, the title company submits the loan for funding from the new lender. Once the funding has been sent to the title company for disbursement, the title company will send an electronic transfer of funds to the home seller's lender to pay off the mortgage. Upon paying the mortgage balance and any real estate charges, the seller will receive the remaining proceeds in a check or via electronic transfer.
During the first five to seven years of a mortgage, the majority of the monthly payment goes toward the interest. After the first five years, the principal of the loan amount begins to decrease more, putting the seller in a better equity position, allowing him to obtain a higher amount of net proceeds. Thus, the time frame after the first five years of ownership is better to place a house on the market.