Thinking of Selling Your House to Pay off Debt? Read This First

Debt is incredibly common in the United States. In fact, according to a CNBC report, the average American holds $90,460 in debt.

That means it’s not uncommon to feel stressed about debt. However, although selling your house might be the right move, it’s not a quick fix. Before you decide to sell your home to get out of debt, first determine why you’re in debt and what kind of debt you’re holding.

“A lot of time, it depends on the type of debt you have,” explains Sunny Wang, president and financial advisor at Essence Wealth and Insurance Services in Santa Clara, California.

“When I advise clients, I look at what type of debt they have, how much, and the interest rate they’re paying on the debt.”

There are a few common reasons you may be in debt:

You bought more house than you could afford

In this case, when you bought the house you’re living in now, based on your credit score and income, you qualified for more than you thought you could afford. Maybe you picked up a bigger house with a pool or a five-car garage. Many people buy more house than they can afford just because they are approved for them, but later, their financial circumstances change – leaving them saddled with high debt.

You struggle with money management

Many people follow a simple financial philosophy: If you want it, you buy it. Unfortunately, it’s easy to end up in excessive debt if you’re not managing your money properly.

If you have tons of debt and you think that selling your house will make your debt problem disappear, you should rethink your plan. Yes, selling your house could wipe out your current debt, but if you don’t correct your spending and planning habits, you’re bound to end up in the same situation a year or two down the road — only next time, you may not have any housing assets to get you out of it.

If you need help with money management, consider a program like You Need a Budget (YNAB) or Mint, a free, web-based personal finance service. You may even consult a financial advisor.

“There are a lot of moving parts, and there are strategies that people may not be aware of,” says Wang.

“So, I think it’s always wise to talk to a professional about it: a financial advisor specializing in holistic planning.”

You had an emergency

Unexpected emergencies like a car accident or health problems can easily put a person in debt. Unfortunately, many people simply don’t have the financial buffer to pay for an emergency. According to the Fed’s 2022 Economic Well-Being of U.S. Households survey, 37% of Americans don’t have adequate funds to manage a $400 emergency expense.

Even if you don’t struggle with money management but have still found yourself in a sticky debt situation, selling your home might feel like the only option. However, it’s worth taking a second to consider your options before divesting your home.

Ask these questions before you sell your house to pay off debt

Once you understand why you’re in debt, it’s time to ask a few questions about your property and the real estate market in your area to assess whether selling off your house to pay off debt is the right approach.

Here’s what you should consider:

How much will you make on the sale of your home?

Just because you own a home, that doesn’t mean you’ll make money when you sell it. Your home sale proceeds are based on how much down payment you laid out at the beginning, how much you’ve paid off on your loan, and the projection of what your home is now worth.

Being one year into paying off your mortgage or 20 doesn’t make a difference. What matters is how much you still owe. Ideally, you want the sale of your current home to pay off the remainder of your mortgage.

Contact your lender or servicer and request your payoff amount. The payoff amount is the total you’ll have to pay to satisfy the terms of your mortgage loan, including any interest you owe until the day you plan to pay your loan in full.

Note that your payoff amount differs from your current balance, which will appear on your most recent account statement and may not include interest.

If your home is worth less than the outstanding balance on your mortgage, things become more complicated, and selling your house to pay off debt simply won’t be feasible.

But it could be the opposite case.

Say you bought your house during a market crash and got it for a steal. You put 20% down, and you’re quickly paying down the mortgage. An appraiser estimates your home is now worth double what you paid. Because it’s worth more now, you have more home equity.

It’s also important to know that selling your house is not free despite a payoff at the end. For instance, closing costs comprise points and lender fees, third-party fees, interest, taxes, insurance accounts, and escrow account funds. These fees differ by location and loan but tend to be around 1% – 3% of your sale price.

“Mortgage companies, banks…they all vary in products, rates and fees,” says top agent Rebecca Carter, who sells homes 47% faster than the average Knoxville agent.

“I always advise people to talk to at least three [banks] and get an idea of what they can offer and what it will cost you.”

If you need help estimating costs, Bank of America provides a step-by-step guide explaining how to calculate your home equity. From there, you can calculate your home sale proceeds.

How high is the rent in your area?

If you’re in debt, handling a mortgage payment can feel impossible. In some cases, renting a house may be more appealing. But before you take that step, consider the cost of renting in your area.

“When selling the home, you need to remember that you have to rent,” Wang explains. “There’s still an expense there.”

The costs of renting and owning a house will depend on the market and where you live. According to a report from real estate research firm CBRE, the average monthly payment for a new mortgage is now 52% higher than the typical apartment rent. The Wall Street Journal notes that between 1996 and 2003, the average cost of buying or renting was essentially the same.

Doing city and area-specific research before determining whether buying or renting is better for your location is a good idea.

Are you prepared to move out of your house?

You’ve determined that selling your home will alleviate your debt. However, sellers often underestimate the emotional attachment they have formed with their home, and moving may be emotionally devastating.

If this is the case, consulting a finance professional about all your options to pay off debt is a good idea.

“They should definitely talk to a professional about it to look at their overall finances,” says Wang.

“Sometimes it’s not as simple as, ‘Okay, I’ve got to pay off my debt. I have to sell the home.’ There may be resources they have that they can tap into and are unaware of.”

Before you sell your house to pay off debt, it’s smart to consider the current housing market and economic conditions. Rising mortgage rates have caused a slowdown in U.S. housing market activity, leading numerous buyers to delay purchasing; nevertheless, home values persist, showing resilience amid this trend.

In its November 2023 global outlook, Deutsche Bank analysts indicated the possibility of a mild recession impacting the U.S. in the first half of 2024, highlighting trends of softening economic data.

Before selling, it’s good to dig into your finances, closely monitor the housing market, and weigh your options.

Still, even though the market may be cooling off, Wang says if you decide to sell, you don’t necessarily need to slash your listing price. And in some areas, home prices may stay steady even if a recession sets in over a long period.

“You can still sell your home right now and get a decent price,” Wang explains.

“It’s not as high as before. We’re not at the peak anymore, but I see that people still sell at a decent price–especially if your home is in a really good location. Those home prices don’t go down much, even through recessions.”

It’s also important to consider taxes if you’re considering selling your home to pay off debt. If you’re selling your house for a profit, you may be on the hook for capital gains taxes.

However, if it’s your first home and you meet a few other simple qualifications, you can avoid capital gains taxes up to $250,000 if you’re single and up to $500,000 for couples under a Sale of Home Tax Exemption. Either way, it’s a good idea to talk to a financial professional before you sell your house to pay off debt.

Selling your home to get out of debt may seem like a great idea, but the risks are significant, and deciding if it’s the right move can vary significantly from person to person.

One potential risk is that it could make it harder to qualify for a home if you want to buy again. If your house hasn’t been foreclosed on, it’s yours, so you don’t need to qualify further.

If you choose to sell and rent for a while because of debt and you have poor credit, you may find it difficult to qualify for a loan later on.

Also, downsizing your home could reduce your monthly payment, but it might not. This depends on the area, the maintenance involved in the new place, homeowners’ association costs, and utilities.

Overall, it’s best to be realistic. Your best selling price is what you and your real estate agent determine based on timing, comps, and house features. Don’t overestimate what your home is worth. Just because you’re ready to sell doesn’t mean market conditions are in your favor.

Next steps to selling your house to pay off debt

Here’s your to-do list before you decide to sell your home to get out of debt:

• Determine why you’re in debt and speak to a financial professional.
• Answer key questions about selling and renting in your area.
• Note the possible perils and expenses of selling.

The answer is not black and white, but between ample information and a good real estate agent who knows numbers, you can determine whether the best path for paying down your debt is a home sale.

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