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

DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to a qualified advisor regarding your own situation.

It’s a common scenario. You live in your dream house, but the mortgage is high, and it’s a stretch to make that payment every month. Your credit cards are maxed. And because this house is your most valuable asset, you’re wondering, “Should I sell my house to pay off debt?”

Selling your house to pay off debt isn’t an uncommon solution, but putting your home on the market isn’t an easy choice either.

Before you decide to sell your house to pay off debt, take caution, and spend a few minutes reading this advice from top financial advisors and real estate agents. Here’s how to decide if you should sell your house to cover debt in 2022.

Start by determining why you’re in debt

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, while 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, determine the underlying reasons you’re in debt and the type 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 what the interest rate is 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. So you took it. Maybe you picked up a bigger house, a pool, or that five-car garage you wanted for years. A lot of people buy more house than they can afford just because they are approved for it, and their financial circumstances change later on–leaving them with high debt.

You struggle with money management

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

In this case, 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 this bout of 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 using You Need a Budget (YNAB), a popular personal budgeting program, trying Mint, a free, web-based personal finance service, or talking to 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 that specializes in holistic planning.”

You had an emergency

Everything from car problems to health scares can put a person in debt. Unfortunately, many people simply don’t have the funds to pay for an emergency. In fact, a YouGov survey found 49% of Americans don’t have the cash to cover a $400 emergency expense.

If you don’t have problems managing money but have found yourself in a sticky debt situation, selling your home might feel like the only option. However, it’s another instance when you should tread carefully.

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

Once you understand the underlying causes of your debt, it’s time to ask a few questions about your property and the real estate market in the area to assess whether selling off your house to pay off debt is the right approach. Here’s what to ask yourself:

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

Just because you own a house doesn’t mean you’ll make money when you sell it. Your home sale proceeds are based on how much of a 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.

Whether you’re a year or 10 years into paying off your mortgage, it doesn’t make a difference when selling your home. The trick is knowing exactly how much you still owe, so you can make sure the sale of your current home pays off the remainder of your mortgage.

To find out, 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.

The payoff amount is not the same as 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 you got it for a steal. You put 20% down, and you’re quickly paying down the mortgage. An appraiser comes out and estimates your home is now worth double what you paid for it. Because it’s worth more now, you have more home equity.

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

“Mortgage companies, banks, they all really 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 and get an idea of what they can offer and what it’s going to cost you.”

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

How high is the rent in your area?

If you’re in debt, having a mortgage looming over your head can feel like it’s too much to handle. For this reason, 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 your local area. According to a recent Realtor.com study, the costs of monthly rent are lower than the costs of buying a home in 38 of the US’s 50 biggest metro areas. However, the same study saw median rent in those same most popular metros spike to record highs in June.

It’s a good idea to do city and area-specific research before determining whether buying or renting is better for your location and situation.

Are you prepared to move out of your house?

So you’ve done the math and determined that selling your house could, in fact, help you pay off debt. Oftentimes, a seller will still feel so attached to their home that moving would be emotionally devastating. If this is the case, it’s a good idea to talk to a finance professional about the other options on the table to pay off debt.

“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 they’re not aware of.”

Some options may include:

• Cutting back on spending and creating a budget
• Halting credit card spending
• Selling off household items you no longer need
• Asking a family member for a loan
• Contributing less to your 401K
• Debt consolidation

2022 economic conditions and selling to pay off debt

Before you sell your house to pay off debt, it’s smart to consider the current housing market and economic conditions. Last year, the housing market was extremely hot. In fact, 98% of real estate agents labeled 2021 as a seller’s market. However, in June of 2022, home sales pulled back 5.4% to hit their lowest point since June of 2020. And with inflation recently hitting historic highs and mortgage rates increasing, home sales could slow even more in 2022.

Additionally, Bank of America economists recently said to expect a recession in 2022, so sellers may also want to consider how a dampened economy might impact their finances.

Prior to selling, it’s smart to dig into all of your finances, keep a close eye on the housing market, and weigh all of 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 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.”

In all cases, it’s also important to consider taxes if you’re thinking about 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 may be able to 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.

The risks of selling your house to pay off debt

Selling your home to get out of debt may seem like a great idea in theory but the risks are large, and whether it’s beneficial depends on both the circumstance and the person making the decision.

One danger is that it could be harder to qualify for a home if you want to buy again. If your house hasn’t been foreclosed on, it’s already yours, which means 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 to buy again.

Also, downsizing your home could cut down on your monthly payment, but it might not. This depends on the area, the maintenance involved in the new place, homeowners’ association costs, and cost of utilities. Be sure to look at the whole picture.

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 that 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 you 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.

Connect with a Top Agent to Help Maximize Your Home Sale

If you’re selling your house to pay off debt, working with a top agent can help. HomeLight data shows that top real estate agents statistically sell houses faster and for more money than average agents.

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