Can I Sell My House After Five Years if I Have a Mortgage?

by Ciaran John, Demand Media
    Lack of equity could complicate your home sale.

    Lack of equity could complicate your home sale.

    After five happy years you might start to feel you have outgrown your nest and are ready to find a bigger place to live. As the property owner you can sell your house at any time, although there are tax advantages in waiting until you hit the five-year mark. Taxes aside, your home's value and your mortgage could make the sale difficult.

    Taxes

    In the United States, you are required to pay capital gains tax when you realize a financial gain after selling an asset. This tax applies to houses, including your primary residence. However, you can avoid paying some or all of the capital gains tax if you used the house as your primary residence and lived in it for a length of time equal to two years over the course of the last five years. If you file your taxes individually you can exclude a capital gain from a home sale of up to $250,000 from your taxes. If you file jointly you can exclude $500,000.

    Amortization

    If you financed your home with a loan that began with an interest only term lasting for five years or more, then you have yet to pay off any of the principal money you borrowed to finance the home. This means you have to sell it for a price at least equal to what you owe, although realistically you need to sell it for more just to cover real estate agent's fees. If you took out a fixed interest loan, then you have reduced the principal somewhat. However, fixed interest loans amortize, which means payments are scheduled to pay off the interest and principal over the loan term. Payments are interest heavy in the early years so you might still owe almost what you borrowed on the home.

    Equity

    Regardless of your loan type, the equity in your home might have risen or dropped due to price fluctuations in the housing market. If you are lucky your home has risen in value, meaning you can pay off the loan and have cash left over to make a down payment on a new home. In a down market, the value might have fallen. In this case, the mortgage balance might exceed the property value. If this occurs, you will probably have to tap into your savings to cover the residual balance.

    Short Sale

    If you are upside down on your mortgage -- meaning you owe more than the home is worth -- but lack the means or the desire to pay off the residual balance, your real estate agent might talk to you about a short sale. In this type of transaction, your lender will let you sell the home for less than you owe. It sounds like a great solution, but short sales have the same kind of impact on your credit score as foreclosures. Simply put, you took on a mortgage debt and failed to repay it in full. Worse still, laws in some states let lenders sue you years later to recoup the remainder of the debt. If you go down the short sale route you might find yourself unable to qualify for a loan on another home for several years.

    About the Author

    Ciaran John began writing in 1994 with contributions to "The Hourly Press" and "The Sawbridgeworth Observer," and has since written for many online and print publications. He has 12 years experience working for financial services companies as a business banker, lender and investment representative and spent four years working in human resources.

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