The average American owes over $104,000 in consumer debt, according to the latest data from Experian. If you feel like you’re drowning in debt, you may be considering out-of-the-box solutions to pay it off — such as selling your house.
Selling your home could free up funds to pay off what you owe, but there could also be some downsides for your finances. Consider all the benefits and drawbacks of this approach before committing to it.
When It Makes Sense To Sell Your House To Pay Off Debt
Is it a good idea to sell your house to pay off debt? There’s no black-and-white answer to this question, but here are a few scenarios in which selling could be beneficial.
You’re Struggling To Afford Mortgage Payments
If you lost your job, had a medical emergency or bought more house than you could afford, it may be tough to pay your mortgage every month. Not only is this a stressful situation, but it could lead to default and ultimately foreclosure.
“If you’re struggling with your mortgage payments and facing foreclosure, selling your home could allow you to pay off the mortgage and avoid the negative impact of foreclosure on your credit score,” says Leslie Tayne, New York-based debt relief attorney and founder and managing director of Tayne Law Group.
You’ll Make Money From the Sale
Before selling your home, consider how much money you’ll make from the sale. This depends on a variety of factors, including how much equity you have and the state of the housing market.
“A seller’s market — where there is high buyer demand — may be an incentive to move out and use the extra proceeds of the sale to pay off your debt,” says Bruce McClary, senior vice president of membership and media relations at the National Foundation for Credit Counseling.
However, if you’re upside-down on your mortgage, meaning you owe more than the house is worth, a sale wouldn’t produce the funds you need to pay off your debt. You’ll also need to factor in various expenses that go into selling a home, such as agent fees and moving costs.
Housing Is Affordable in Your Area
Although selling your home could eliminate your mortgage payment, you’ll still need to cover housing costs. This might mean downsizing to a more affordable home or renting.
Do some research on the cost of living in your area to determine whether you can find a less expensive housing situation. If you can reduce that cost, you’ll have more money each month to pay toward your other debt.
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Pros and cons of selling your house to pay off debt
As with most financial decisions, there are both pros and cons to selling your house to pay off debt. Consider both the benefits and potential downsides before you proceed.
Pros
— Potential to profit from your home. If your house has increased in value since you bought it, you may make a profit through selling. That’s also true if you’ve paid down your mortgage and hold a good amount of equity. With the money you make from the sale, you can pay off any remaining mortgage, as well as other debt that’s been dragging down your finances.
— Lower monthly housing costs. A high mortgage payment can make it difficult to pay back other types of debt, as well as meet your other financial goals. After selling your house, you could move to a more affordable house or rent for the time being to reduce your monthly housing bills.
— Improve your mental health. Debt can be a major source of stress in your life, especially if you’re worried about missing mortgage payments and having the bank foreclose on your home. Although moving can be challenging, too, you may feel less burdened without the costs and demands of homeownership.
Cons
— Home sale fees. You may have to pay various fees to sell your home, including an agent’s commission and staging costs. “Selling your home involves quite a bit of time and expense,” says Tayne. “[It’s] an expensive option for paying off debt and probably not the ideal route to take.”
— Missing out on future appreciation. Despite rising interest rates, home values in many areas are at or near all-time highs. If you live in an area where home prices are expected to go up, selling your house could mean missing out on future appreciation and the potential to make a bigger profit. “Selling your home to pay off your debt may also leave you with little or nothing to show for the equity you built while paying down your mortgage,” says McClary.
— Capital gains tax. If your home has increased in value, you may have to pay a bigger tax bill on the sale. “[If] it’s not covered by the capital gains exemption for primary residences (up to $250,000 for singles and $500,000 for married couples filing jointly), you may owe capital gains tax,” says Tayne. This tax rate could be up to 20% for long-term capital gains or as high as 37% for short-term capital gains, depending on your situation.
Alternatives to Selling Your House
Although your house might be your biggest asset, selling it isn’t the only way to pay back debt. McClary recommends speaking with a credit counselor about your options.
“When the debt you wish to pay off is past due and you would rather remain in your home, a nonprofit credit counseling agency can help provide affordable debt management options that help preserve homeownership,” says McClary.
A counselor may help you come up with a strategy for debt repayment, such as the debt snowball or debt avalanche approach. You might also qualify for more affordable terms on your debt through a debt consolidation loan or credit card balance transfer.
Selling your home could give you a fresh start for a more affordable lifestyle, but you may still face challenges when looking for a place to live. Consider alternative ways to manage debt or increase your income to determine the best option for you.
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Should I Sell My Home to Pay Off Debt? originally appeared on usnews.com
