Why these loans must be paid when you sell
The CFPB describes a home equity loan as a lump sum borrowed against your home equity, and a HELOC as a line of credit, like a credit card, that you can draw on again and again up to a limit. Both are secured by your house and are treated as second mortgages that you pay in addition to your first mortgage.
A buyer's lender will want the house free of any lien it did not agree to. So both the first mortgage and any second loan are paid off at closing. The Massachusetts purchase and sale form checklist from the state includes a clause called "use of money to clear title," which lets the closing proceeds pay off liens so the buyer gets a clean deed. See the state's P&S outline.
Step by step: from payoff request to release
- Find every loan. Look at your statements, your 1098 tax forms and, if you are not sure, ask your attorney for a title search. Old or forgotten HELOCs show up in the registry of deeds records. See liens and judgments when selling.
- Request a payoff in writing. Massachusetts law (MGL c.183 s.54D) requires a servicer of a mortgage to send a written payoff statement within 5 business days of a written request, with an exact amount for a date you name and a per-day figure after that. HELOC lenders do not always label the product the same way, so ask for the "payoff and closing instructions" and say the loan is being closed because of a sale. Allow extra time anyway; we recommend asking at least two weeks before closing.
- Freeze the line. A HELOC works like a credit card, and the CFPB notes that your available credit is replenished when you pay. A draw after the payoff letter is issued would leave a balance behind. Ask the lender for a written freeze or "stop draw" confirmation, destroy or return any checks and cards, and stop automatic draws.
- Ask how the lender wants to be paid. Most lenders give wire instructions and a letter saying that payment of the stated amount, plus the per-day amount after the date, will close the account and release the lien. Confirm the wire instructions by phone with a number you already trust, not one from an email.
- Closing. Your attorney pays the lender from the buyer's funds. The seller's proceeds are what remains after all payoffs and costs.
- Release and recording. Under MGL c.183 s.55, after full payment the lender must record a discharge or deliver one to your closing attorney within 45 days. If the lender does not, the law allows damages. Get a copy of the recorded discharge for your files.
Timing and the "closing the line" detail
For a plain home equity loan, the payoff is the balance plus interest through the payoff date, and a per-day amount if closing is late. For a HELOC the payoff is whatever you have drawn plus interest and any fees. A payoff statement under c.183 s.54D has to be good for at least 30 days from issue if the lender sets a time limit, but a HELOC lender may have its own rules, so ask how long the figure is valid.
Check your credit agreement for an early-closure or termination fee. Some lines charge one if the account is closed within a set number of years. We could not find an official rule that applies to every lender, so read your own paperwork and ask the lender to put any fee in the payoff.
If you also have a first mortgage, ask each lender separately and give both the same closing date. See selling a house with a mortgage for the first-mortgage steps.
Example: what two payoffs do to your check
| Line | Amount |
|---|---|
| Sale price | $600,000 |
| First mortgage payoff | -$298,000 |
| HELOC payoff (drawn $62,000 + interest) | -$62,400 |
| Agent fees (example 5%) | -$30,000 |
| Deeds excise tax ($4.56 per $1,000) | -$2,736 |
| Attorney and other costs (example) | -$3,000 |
| Estimated cash to you, before income tax | $203,864 |
A HELOC with an unused limit of $100,000 does not reduce your check. Only what you owe counts. But an unused line still has to be closed, or the lien stays on the title.
Run your own numbers in the net proceeds calculator.
If the sale will not cover both loans
If the sale money after costs cannot pay both loans, the second lender usually has to agree to accept less before it will release its lien. That is a short sale of the second loan. The lender is not required to say yes, and it may want a payment from you. Get any agreement in writing before closing, and ask whether it covers the full remaining balance. If you are behind on payments, see behind on mortgage payments and talk to a HUD-approved housing counselor.
General information only. Your attorney reviews payoffs and releases. Ask a CPA about taxes; if you used the loan for something other than the home, the interest deduction rules can differ.
After closing: what to check
- The HELOC account shows a zero balance and is closed, not just "paid".
- The recorded discharge is in your file. Ask your attorney to confirm the recording date, and note the 45-day deadline.
- No automatic payments or autopays remain on the old account.
- Your next statement shows no further charges. If a small amount shows up, pay it and ask for a written closure confirmation.