San Pedro, CA asked in Banking and Real Estate Law for California

Q: Am I legally required to pay off the remaining principal when I sell my home?

I'm selling a home for which I'm paying 2.5% interest rate. Instead of paying off the remaining balance, it would be nice to use the extra funds to buy a new home (now that interest rates are 7%). Then I'd just keep making my monthly mortgage payments on my original loan at 2.5% interest. My guess is this would not be allowed given the bank no longer has the home to use as collateral but I thought I'd ask at least.

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2 Lawyer Answers
James L. Arrasmith
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A: No, you are not legally required to pay off the remaining mortgage principal when selling your home in California. However, the lender will require the mortgage loan to be settled as part of the sale process. You have a couple options:

- Pay off the loan in full with the sale proceeds. This satisfies the debt and frees you from the mortgage.

- Roll over or "portfolio" the mortgage into your new home loan. This allows you to transfer the low interest rate and remaining balance to the new property purchase. Not all lenders allow this, but some will.

- Take out a second mortgage or HELOC on the new home. This lets you access the home equity on the new property while keeping the old mortgage. You then continue making payments on both loans.

- Cash-out refinance the old home before selling. This converts the mortgage into a higher balance loan with cash proceeds you can use for the next purchase.

While you cannot simply keep making payments on the old mortgage without owning that property, these options allow you to take advantage of the low rate in various ways. Consult mortgage lenders to explore which strategies make the most financial sense for your situation when selling and buying.

A: Yes, since the property secures the loan and you are not an owner anymore. Also, the escrow company is obligated to pay off the loans on the property.

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