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What Happens If You Make A Profit On Your Home Sale?
With most home financing based on a 30-year term, selling before paying off a mortgage is a very common practice. So what happens if you sell your home for more than your mortgage balance? Making a profit on a home sale is possible even if you haven't paid off your mortgage. When making a profit, you can use the funds for a down payment on a new home or anything you'd like, really. However, your ability to turn a profit comes down to your sale price and the amount of equity you've built in your home.
What Is Home Equity?
Home equity is a figure that represents the total value of your property ownership. To calculate your home equity, simply take the home's market value and subtract the outstanding mortgage balance and any other liens on the property. The remaining figure is your home equity. There are two different types of home equity:
- Investment Equity - Includes your initial down payment, mortgage payments against your loan's principal balance, and the cost of upgrades or renovations you've made while owning the property.
- Earned Equity - Additional equity accumulated due to rising home values.
Determining Your Payoff Amount
In order to estimate your potential profit from a home sale, you need to determine your mortgage payoff amount. Keep in mind, your payoff amount isn't the same as your remaining loan balance. The payoff amount includes any accrued interest since the closing date. You'll most likely need to contact your lender to determine the exact payout amount.
What Happens To Your Remaining Mortgage Balance If You Sell Your Home?
If you sell your home prior to paying off your mortgage, the buyer's funds will first be applied to your remaining mortgage balance and any additional loans against the property. After the mortgage balance has been paid off, the remaining funds will be applied to closing costs, which include agent commission, escrow fees, and taxes. Finally, any remaining funds leftover at this point become your profit.
What you do with your profit is up to you. Most people take their profit and reinvest it in a new home. However, if you're planning to downsize or move into a rental property, you may want to consider saving the money for retirement or investing it. Or, take a vacation — it's ultimately your money.
It's possible to turn a profit on your home sale even if your mortgage isn't paid off. However, your sale price, current home equity, and the amount of time you've owned the property are two factors that will directly influence your profit.
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