What does "owed at sale" mean, and why is it so large even after years of payments?

Summary

"Owed at sale" is the lump sum that comes out of your sale proceeds to close the home equity product in the year you sell. For a loan that is the principal still outstanding, for a HELOC the balance you drew and haven't repaid, and for a home equity investment the settlement its contract formula produces. It stays large when a loan is spread over a long term or a HELOC is paid interest-only, because years of payments may have barely touched the principal.

It is paid on the day you sell

For a HELOC or an HEI, the sale is the settlement date. The CFPB's HELOC booklet puts it plainly: "If you sell your home, you are generally required to pay off your HELOC in full immediately." A home equity contract is repaid at the end of its term "or upon a triggering event, such as when the homeowner sells the home."

The column holds that closing payment and nothing else. Payments made before the sale are counted separately, so nothing is counted twice.

A longer term leaves more behind

Here is $50,000 at a fixed 6.75%, sold after five years, on three terms. The rate is held the same across all three to isolate the effect of the term; in practice Regions Bank, for one, lists the loan term among the factors that set its APR.

On a 10-year term the payment is $574.12, and $29,168 is still owed at year five. Stretch the term to 15 years and the payment drops to $442.45, but $38,533 is owed. At 20 years the payment is $380.18 and $42,963 is owed, which is 86% of what you borrowed, after 60 payments. Early payments on a long loan go mostly to interest.

So a lower monthly payment is partly a larger bill at the sale.

An interest-only HELOC can leave all of it

Some HELOCs let you pay only interest during the draw period, "which means that you pay nothing toward the principal," as the CFPB booklet says. FourLeaf Federal Credit Union's HELOC works this way for its first 10 years. Draw $50,000, pay the interest, sell in year five, and the column shows $50,000.

The booklet also warns that some plans end the draw period with "a large amount called a balloon payment." If you haven't sold by then, the same principal comes due anyway.

A home equity investment puts everything here

With no monthly payments, an HEI's whole cost ends up in this column. The CFPB notes that "the repayment amount can be in the hundreds of thousands of dollars," and that homeowners "generally can't make partial payments" to bring it down along the way. A homeowner who cannot pay at the end of the term risks "having to sell their home or face foreclosure."

Some contracts share losses too. Point says that if the home's value falls below the contract's appreciation starting value, "Point will share in the loss."

This site's calculations leave out the first mortgage, early-payoff charges, taxes and insurance. An HEI provider's fees are taken out of the cash you receive, so they are not in this column either.

Sources

Written by Kaz (pen name). Figures are copied from providers' published pages on the dates shown. We have not used these products. Corrections: contact form.