Should I Sell My House to Pay Off Debt?

Choosing to sell a house to pay off debt is one of the toughest decisions you’ll ever have to make. For most people, their home comprises the largest asset in their portfolio. However, it’s not merely a financial matter—it’s an emotional one.

Homes and finances are never simple things. Instead, numerous complex and competing factors make them hard to think through clearly.

Should you sell your house to pay off debt? This article breaks those complications down into bite-sized variables that are easy to digest. We’ll also inform you of how you can use a home equity loan alternative for debt consolidation.

Common Reasons to Sell

More people than you may realize currently find themselves asking, “Should I sell my house to pay off debt?” Various life circumstances and factors ensure that people’s answers differ, but, unfortunately, the prevalence of debt leads many to the same dilemma.

An October 2021 evaluation of Experian data determined the average American is $90,460 in debt.

Beyond the overall per capita metric, generational trends help highlight why so many people find themselves navigating this situation. Generation X (i.e., those aged 40-55) and Millenials (i.e., those aged 24-39) are currently progressing through the periods of life we most readily associate with home buying while contending with the highest debt amounts.

By generation, people aged 40-55 carry the highest:

• Total debt, averaging $135,841
• Mortgage debt, averaging $238,344 (Millennials average $224,500, reaching second place in the evaluation)
• Home Equity Lines of Credit (HELOC) debt, averaging $49,221

Many people choose to sell their homes so that they can pay off their mortgage loan, student loans, and other loans and embark on a debt-free existence (whether that means moving to a different house, renting, or embracing travel).

Moving Forward

There’s enough mental static in making this decision without adding guilt or embarrassment to the mix. Debt happens. What matters is that—right now—you’re here looking for solutions.

To help settle any anxiety you may be experiencing, try to remind yourself that:

1. You aren’t alone.
2. Other people have managed to navigate this challenge.
3. A prevalent problem generally leads to dedicated solutions.

Can You Take Money Out of Your House to Pay Off Debt?

When determining your answer to this challenge, it helps to break the subject into two broad categories and list out the factors comprising each.

• Objective – This category comprises factors that are mostly fixed, and they may be tangible or intangible. Though you may affect these over time (e.g., paying down debt, making home improvements), they remain fairly set. The tangible largely consist of the physical state of your home and property, whereas the intangible typically follow your financial situation—as measured by metrics such as:
  
  Total debt
  Debt-to-income ratio
  Home value
  The cost of your options

• Subjective – These factors do not correlate to equations, assessed values, or physical states. Instead, these pertain to—nevertheless important—personal sentiments such as stress caused by your debt, emotional connection to a house, and the prospects of your alternative living situation.

Since objective considerations cannot be ignored, they will likely carry the most influence on your decision. However, this is not an instance to dismiss subjectivity. On the contrary, you should refer to your list of subjective considerations as much as circumstances allow, as these factors are unique to your perspective and experience.

They’ll help you arrive at the realistic solution with which you are most comfortable.

Objective Considerations

There’s more to this than subtracting the expected profit of a house sale from total debt (though that’s a good start).
Other circumstances and costs affect even rough financial estimates.

How Much Money Will You Make From Selling?

Determining the expected profit of a house sale may be difficult without consulting a professional, but accounting for some expected factors can help you arrive at a reliable estimate:

• Profit of home sale – To calculate how much you get for the sale of your house, subtract the amount you still owe on the house (i.e., your mortgage loan balance) from its appraised value.
• Real estate agent fees – Real estate agent fees typically range between 5-6%.
• Seller concessions – These are unpredictable closing costs that sellers sometimes agree to pay to complete sales.
• Home transition costs – This is the cost to move (e.g., new rent, security deposit, moving truck).
• Repairs needed to sell home – Some of your home and property’s infrastructure may need repairs prior to its sale.
• Taxes from title transfer, escrow, and notary services – These are variable, but your area’s rates should be readily available with a bit of research.

Debt-To-Income Ratio (DTI)

In some ways, your debt-to-income ratio (DTI) is more important than your total debt. This is because the ratio tells you what percentage of your income is dedicated to paying off your outstanding debt every month and, therefore, represents a better summation of your financial situation and habits.

1. Add up your total monthly payment on all of your debts—not only your mortgage.
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2. Add up your total monthly gross income, which is the pre-tax amount you get from work or services provided, as well as fees, tips, royalties, and commissions.
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3. Divide the total monthly debt payments by your gross monthly income to get your debt-to-income ratio.
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Expert opinion on this varies, but Chase advises that you keep it at or below 43%, with lower nearly always being better. So if you have high total debt but a low debt-to-income ratio, you may not be in as bad shape as you think.

Expected New Cost of Living

Selling your house doesn’t immediately result in being free and clear of debt. You’ll need to calculate and subtract the cost of your new living situation from your potential debt payment.

Factors to consider include:

• Rent
• Security deposit
• Cost of living in your new area
• Moving costs
• Commuting costs

Subjective Considerations

Beyond the fixed factors related to your housing and financial situation are those that reflect your emotions and personal preferences:

• Trauma of selling – Think seriously about the possible emotional toll of selling your home. If you’re able to view the transition as “moving to a new opportunity,” the toll may carry less impact. This especially pertains to people with children or who have lived in the same home for a long time.
• Stress of carrying debt – Debt is an emotional burden as well as a financial one. How much is debt disrupting your happiness? There are also potentially tangible costs related to this—stress can lead to health problems.
• Your new home – Your new home is bound to have its own challenges. For instance, did you know that an extra 20 minutes of commute time diminishes happiness as much as a 19% pay cut?

Create a list of subjective pros and cons. It’s a simple but effective method for sorting out the myriad thoughts that arise when asking yourself, “Should I sell my house to pay off debt?”

Have You Explored Your Other Options First?

Evaluating your objective and subjective considerations will help you arrive at an answer. However, before selling your house to pay off debt, make sure you’ve explored all possible options. Remember that common challenges often lead to dedicated solutions. 

Options to investigate include:

• Loan modification – Foreclosure can be as hard on lenders as it is on borrowers. Contacting your lender to see if they’ll renegotiate rates is free, fast, and easy.
• Home equity loan – A home equity loan to pay off debt should never be entered lightly, as the long-term debt trade-offs may leave you in the same situation or worse. Critically, your home’s value secures the loan, so defaulting runs a much greater risk of repossession.
• Sale-leaseback – A more recent solution, sale-leaseback involves selling your house to unlock and convert its equity. With the right buyer, you can lease it as long as you’d like and even choose to buy it back.

Work With a Sale-Leaseback Program to Pay Off Debt

A sale-leaseback solution offers a low-stress alternative service for those considering whether to sell their homes to pay off mortgage debt, credit card debt, or even a student loan. These programs are designed to convert your equity to cash while you stay in your home as a renter and figure out your next steps.

Key Takeaways

If you’re considering selling your house to pay off debt, make sure you have all the information beforehand. Talk to a financial advisor about whether this is the right path for you and discuss alternative options that might be better.

Sources:

Chase. What is debt to income ratio and why is it important? https://www.chase.com/personal/credit-cards/education/basics/what-is-debt-to-income-ratio-and-why-it-is-important

CNBC. The average American has $90,460 in debt—here’s how much debt Americans have at every age. https://www.cnbc.com/select/average-american-debt-by-age/

Investopedia. Who Pays Real Estate Fees? https://www.investopedia.com/financial-edge/0611/understanding-real-estate-commissions-who-pays.aspx 

IRS. What is Taxable and Nontaxable Income? https://www.irs.gov/businesses/small-businesses-self-employed/what-is-taxable-and-nontaxable-income

National Institute of Health. STRESS AND HEALTH: Psychological, Behavioral, and Biological Determinants. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2568977/