How a HELOC differs from a regular mortgage
A home equity line of credit is a revolving line, like a credit card secured by your house. You can borrow, repay and borrow again during the draw period. Like a mortgage, it is recorded against the property as a lien, which is why it has to be dealt with before the buyer gets clear title.
The differences that matter when you sell:
| First mortgage | HELOC | |
|---|---|---|
| Balance | Goes down with each payment | Can go up if you draw on it |
| Payoff | Fixed amount plus daily interest | Balance on the payoff date, plus interest and fees |
| Lien position | Usually first | Usually second, behind the mortgage |
| Extra step at sale | None | Freeze and close the line |
The balance can change until the day the line is closed. That is the risk title companies guard against.
Step 1: Request the payoff and freeze the line
The title company asks each lender for a payoff. Regulation Z’s payoff rule, 12 CFR 1026.36(c)(3), generally excludes home equity plans from the servicing rules, but the official interpretation says the payoff requirement “applies to HELOCs secured by a dwelling.” So the HELOC lender must send an accurate payoff within seven business days of a written request.
With the payoff request, the title company usually sends a request to freeze the line, signed by you, so no further draws can be made. Without it, a check written against the line, an automatic transfer, or a fraudster with your account login could raise the balance after the payoff figure was issued.
What you can do:
- stop using the line as soon as you list the house
- cancel any automatic transfers or overdraft links to it
- shred unused HELOC checks
- sign the freeze-and-close letter when the title company sends it
Step 2: Pay off and close the line at closing
At closing, the HELOC payoff is a debit on your side of the settlement statement, usually listed right after the first mortgage. The title company wires it to the HELOC lender along with the instruction to close the account.
Closing the line, not just paying it to zero, is the key. A paid-off but open line is still an active lien the lender could lend against. The title company needs the lender to treat the payment as a final payoff so the lien can be released.
Step 3: Get the lien released
Once the HELOC is paid and closed, the lender must clear the record. R.C. 5301.36 requires a mortgagee to record a release in the county recorder’s office within 90 days of the satisfaction. Ohio’s statute speaks of mortgages, and a HELOC is secured by a recorded mortgage on the home.
If the release doesn’t get recorded, the current owner can recover $250, and after a written notice in the statutory form, attorney fees and $100 a day up to $5,000. Keep the HELOC payoff letter and the lender’s confirmation that the account is closed.
When the HELOC makes the numbers tight
A large HELOC balance can leave little equity. Run the numbers early:
Example for a house in Medina:
| Line | Amount |
|---|---|
| Sale price | $260,000 |
| First mortgage payoff | minus $155,000 |
| HELOC payoff | minus $48,000 |
| Commission at 5.65%, if listed | minus $14,690 |
| Conveyance fee at $3 per $1,000 | minus $780 |
| Other closing costs and tax proration (example) | minus $4,000 |
| Estimated proceeds | about $37,500 |
If the total of both loans plus costs is more than the price, the sale can’t close without a shortfall payment or both lenders agreeing to take less. In a short sale, the HELOC lender, as the second lien, often has to sign off separately. See short sales in Ohio.
Can a HELOC lender stop your sale?
No, not if it is paid in full. But the lender doesn’t have to let the line stay open after a sale. Regulation Z, 12 CFR 1026.40(f)(2), lets a lender terminate a home equity plan and demand the whole balance when “any action or inaction by the consumer adversely affects the creditor’s security,” and the official interpretation gives as an example a consumer who “transfers title to the property or sells the property without the permission of the creditor.”
In practice, that means the HELOC is paid off at the sale, not carried over. If you plan a sale with seller financing or a land contract, talk to your HELOC lender first; see seller financing in Ohio.
HELOC checklist for sellers
- Find your most recent HELOC statement and the lender’s contact number.
- Stop drawing on the line once you decide to sell.
- Cancel automatic transfers and overdraft links.
- Tell the title company about the HELOC when you open the file.
- Sign the freeze-and-close request promptly.
- After closing, keep the payoff letter and the account-closed confirmation.
- Check the county recorder’s site after 90 days to confirm the release was recorded.
Taxes on HELOC money
Paying off a HELOC at sale doesn’t change your capital gain. Your gain is figured from the sale price, selling expenses and your basis, not from your loan balances. If you used HELOC money for improvements, such as a new roof or addition, those improvements raise your basis under IRS Publication 523. Keep the receipts.
For the payoff process in general, see how to get a mortgage payoff statement.
