Can I Pay Off A HELOC At Closing?

If you’ve opened a line of credit against real estate you own – commonly referred to a home equity line of credit or HELOC – you may be wondering, “Do I need to pay this thing off in full before I sell my home?”

The short answer is “No,” but a more accurate answer is, “It depends.”

Let’s use an example to illustrate.

Joe and Jane bought their home in Yonkers in 1998 for $350,000 and paid cash. A few years later, in order to help their children pay for college, they swung by their local bank and applied for a home equity line of credit in the amount of $100,000. Because there were no other liens on the property, the local bank opened a checking account in their names, deposited $100,000 into the account, handed them a checkbook, and recorded a lien against the property with the Westchester County Clerk.

Fast forward to 2021. The kids are done with school. Joe and Jane aren’t exactly retired, but they’d like to escape New York winters so they plan on putting their home on the market. A few realtors have assured them their house is now worth about $695,000, so they’re thrilled. However, the balance on that HELOC is right around $79,000.

So do they have to find $79,000 to pay off the HELOC before they close on the house?

Not at all. Rather, Joe and Jane can contact the bank that holds the HELOC, explain they’ll be closing in a few weeks, and request a HELOC freeze. The bank will provide a letter that states the HELOC account has been frozen which prevents Joe and Jane from writing any more checks out of the account. The same freeze letter will identify the balance owed which will be paid at closing from the sale proceeds.

Nice and easy, right?

However, let’s say Mike and Mary also own a single family house in Yonkers and they also have a HELOC they took out ten years ago. Unlike Joe and Jane, though, Mike and Mary have two other mortgages recorded on their property – money they borrowed to help start Mike’s business and fund Mary’s graduate schooling. And those two other mortgages have priority over the HELOC, meaning the two mortgages must be paid at closing before the HELOC is paid.

In this situation, everything will be fine at closing so long as the amount of the sale proceeds is greater than the total balance of the three loans. If not, then it’s unlikely the closing will occur.

So, again, the quick and easy answer as to whether a homeowner can pay off a HELOC at closing is yes, so long as the sale proceeds are sufficient to do so. And getting it done is as simple as either logging into your HELOC account on your bank’s website to request a freeze letter to giving the bank a ring.

If you have more questions or if you’d like to discuss a specific real estate issue, please give us a ring or send us an email.