“Help!” you are crying. “My debt load is weighting me down so much! Should we sell our house to get out of debt?”
Although I appreciate your willingness to sacrifice in order to dump debt, selling your house may not be the best way. Ask yourself the following question:
Why am I in debt?
You need to identify the source of your debt before you can properly attack it. Is the debt a result of poor money management or because your house is too big for your budget?
Hint: if your mortgage payments are less than 30% of your take home pay, you have money management problems. On the other hand, if your mortgage payments are above 40%, you probably have too much house. Depending on how you answered, here are some tips:
Money management problems
Selling your house to pay off debt is treating the symptom instead of the illness. Reality is that you can afford to keep your house if you learn to manage your money. Whether you eventually sell your house or not, you need to:
- Make a budget. You will never be able to manage your money without a budget. No exceptions. Write down all of your take home pay and all of your expenses. Agree with your spouse. Now track them and adjust them each month until you are confident that you are in control of your money.
- Get rid of other debt. If car payments are dragging you down, get rid of your car. Give up eating out, vacations, satellite TV, and look for other ways to cut expenses until the debt is gone. Consider taking on a second job. It won’t be easy, but the best way to deal with your mess is to clean it up.
Too much house
People with too much house often manage their money quite well and live very frugally just to make their monthly mortgage payments. Is this you? Does your house payment feel like an anchor trying to pull you under? Are you unable to make progress on your debt reduction because your house payment controls your life? If so, you probably need to sell your house. This being said, you should not blame your debt on your house payment; you still need to manage your money and make the same sacrifices (get rid of car, no eating out, no vacations, etc) in order to eat away at that debt while you are marketing your house.
Special considerations
While the above analysis should give you the guidelines for whether to sell your house, I realize the decision is not a black and white issue. Some special considerations are:
- “I know I have money management problems, but I have so much debt that it will take me years to get rid of it. I would love to sell my house and take care of the debt immediately.”
I applaud your enthusiasm. My concern, however, is that you may be taking a shortcut to learning money management. I suggest you try the tips under “money management problems” for six months and then re-evaluate your decision.
- “We fall in money management problem camp, but we hate our house. Shouldn’t we go ahead and sell it?”
Sure. But now the motive changes. You are selling because you hate the house, not because of your debt. I think you should sell, pay off debt, and rent while you are saving up down payment for another house. Of course continue working on the source of your problem: money management. Otherwise, whether you rent or buy again, that debt will reappear.
- “We know we have too much house, but we love our house. Is there a way we can keep it?”
I hate to see people sell their houses. It is an extreme move, especially if you love your house. But if you are living on a tight budget, you don’t see any big pay raises on the horizon, and you are unable to make progress on your debt – or save for an emergency fund or invest for retirement – your house is controlling your life. You would probably be better off with less house.
- “I know I have too much house, but I am recently divorced and I want the kids to maintain the stability of living in the same house. Finances are extremely tight because we used to make the mortgage payments on two salaries and now I am making them on my own. Any thoughts?”
I realize this is a delicate time for you and your children. However, staying in a house you can’t afford is not in your best interests or theirs. Children are much more resilient than we give them credit for. Moving to a smaller house with less stress will usually be best for both the kids and for you. Explain to them (age appropriately) what is going on and my hunch is that they will do fine.
Concluding thoughts
Selling your house to pay off debt, while admirable, can be a way of masking a money management problem. You need to clearly identify whether your debt is because of poor money management or too much house before you make your decision. The more clarity you have about the source of your debt, the better decision you will make.
Have you ever sold your house to pay off debt? How did it go? Would you make the same decision again?
Hi Joe,
Great job addressing the ‘poor money management vs. too much house’ issue! I think you’re exactly right about identifying the true motive behind selling your house if you have debt.
We’ve never been faced with that decision since we don’t own a home, but the points you make help me understand how to think through the issue. Thanks!
Tim,
Thanks. I am glad that my reasoning made sense. Best wishes on getting your own home when that time comes.
I totally agree with the need to determine the problem first. Raising cash will not solve a spending problem! Thanks for the insight!
Good answers. One more thought – selling a house typically costs some amount of money. There are real estate fees, repairs, taxes etc to be paid. My typical estimate is 10%, but in a recent real estate transaction I did, it was more than that.
I think selling the house for some people is an excuse to spend more and avoid the money management all over again. They will spend doing “fix-up” work.
@Rich,
Right: determine the problem and attack it.
@Randy,
Good point. People do need to figure in the cost of selling their house. Maybe doing so will be a deterrent to selling when the real issue is money management. I would hope so, but, for most, I doubt it.
Thanks for the good article and comments!
If you are looking to buy a home, make sure and do your research. Compare the figure to what you make.
If you are currently in a home that is too much for you, check your options and make the best decision possible. If your house is under water (you owe more on it, than it is worth), there’s probably not much you can do.
Depending on your situation, it may be best to sell.
@Beth,
I agree with your decision to sell one of your houses. Because this was an investment property (not your personal dwelling), I would consider it an emergency fund and, with your husband out of work, you were in an emergency. Next time, though, I hope you have a liquid emergency fund before investing in real estate (or anything else).
@Chris,
Maybe. It depends on the reasons for the debt. If the debt is because of poor money management, then moving to a smaller home probably won’t solve the problem. But if the house is too much house (over 40% of take home pay), then I totally agree.
@Nate,
This wasn’t about buying a home, but being as you brought it up, I think the criteria should be: zero debt, fully funded emergency fund in place, 20% down payment, 15 year fixed rate loan, and payment no more than 25% of take home pay. I know those are pretty stringent requirements, but if people would follow them, foreclosures would be much less common. Thanks for the comment.
@Joe
Thanks for your comments here. I was trying to tie my comments into your point about debt by saying avoid adding to it and also getting out of it, but I should have been more specific. Sorry about that. 🙂
Hey Joe, this is a very important distinction. I’ve known people who have had the “thrill” of owning a house wear off, and they don’t mind selling – I guess they would be in the “I hate my house” crowd.
I think that people tend to become WAY too attached to their homes, and make irrational decisions in order to keep it.
Hi Joe,
many thanks for the great level perspective on this issue. We are in the process of making a decision, and fit the “too much house” band. In the UK there has always been pressure to “get on the property ladder” as soon as we become adults. After a period of unemployment our debts accrued, and we are drowning in mortgage payments. We think our family would benefit from the peace of mind of living without debt, and hopefully after five years have a down payment should we wish to buy again.
The elders in my family are keen for us to hang on whatever the cost, but I don’t think this is the best for our children, as we are stressed when our salary disappears as soon as we get it each month.
Thank you for your wisdom.
Hi Joe,
Thank you for your article. I really appreciated the logic. My husband and I live in a large home that is nearly “under water” and I want to get out before we go under. We struggle to pay the house payment on time because it is too high, we can’t afford to do needed maintainence because the house payment and heating.. are too high. We need new windows to help lower the heating bill but can’t afford the windows. We got here by our own poor financial planning and some other unfortunate experiences. We have been at this house for 14 years now and I think we have been struggling for about 10 years of that. I want it too end. I just want to start fresh. The stickest problem however is that my husband wants to hold on and never leave this house. I have begun to hate this house. Any suggestions? Do we keep plugging away and hope to refinance? Do we sell? Help!?
@Marsan,
As you pointed out, the stickiest (and most important) problem is getting you and your husband on the same page. You two need to talk, talk and talk some more until you are in agreement. Maybe, together, you could create a list of reasons for selling or not selling. Such a process should make the discussion as objective as possible.
I would be glad to chip in my two cents worth on whether you should sell, but only if the request comes from both of you. Feel free to email me at joe at plemoncoaching dot com
I wish you two well as you work through this issue.
I’m not sure what to do…we currently own a home that has enough equity in it to pay off our debt after legal and realestate fees are paidout. we will not have any money left over to purchase another home though as we do not have any savings. We are 45, have two teenagers and live in Vancouver, BC Canada.
We are struggling with if this is the best thing to do. I may not save us much money monthly ~ maybe $500. it will pay off our debts though.
do you have any feedback or advice?
thank you.
Dear Kim, I am just aimlessly searching the web for answers to our problem and I saw your May 16 2011 comment on here. It is the EXACT situation my husband and I are in at this moment in 2013, right down to the ages of the family members! If this message reaches you, please email me back at [email protected] and tell me what you decided and how it worked out for you. We are at our end with trying to keep up with it all and have an opportunity to sell our home to settle all debt, but we will walk away with nothing but bad credit. We have good jobs, but it is scary to think at our age we are starting over and with less credit than we had when we began this journey almost 2 decades ago. I am praying your situation turned out ok, but it would really help me to know how it went for someone else. Thanks.
I have a question.
My husband and I are living paycheck to paycheck and have 50k in just credit card debt.. Weve lived in our house on the lake for 10yrs.. Its a old 70s house that we now owe 173k on 22yrs left. We r having major family issues because of this debt always fighting because were both working now the house cant get done and my husband has to work overtime just to pay the bills. Our house just appraised for 375k if we sale it for 350k we will have 177k left over we could pay our 50k debt off and put 127k down on another 70s house in the neighborhood they are asking 379k if we put down 127k with the interest 3.5 percent our payment will be 300-400 less a month this house is completly redone every room granite counter tops, wood floors, new windows new pool and hot tub they are on a acre were on 1/2 and they have more square footage.. My husband figured this out and we would end up with 2000k extra a month just for savings if we did all this. Our house is old and needs fixing up itself.. Seems like the only downfall would be that were paying now on a 289k house with a 30yr mortgage. Whats the better route??
We were very good at managing our money and decided to move to a larger home in a good neighborhood in 2005. The house payment is a lot more than we can handle (even though at that time they approved us for twice what we bought it for). Our entire family has moved far away, my son has issues and there are options where they moved to help him. My husband has already been promoted to a remote job so we could move. However we are saddled with a house that is too expensive and wouldn’t sell anywhere near what we have on the loan. We want to buy a very small house and get out of this one. Are there options?
My problem is that I cannot find work. I have been unemployed for over a year with no income, but my house is paid off. I have a $12,000 lean against it and have to maintain insurance coverage, which is not that much, but when society will not give you a job, what do you do?
My husband and I are stuck in a little conundrum. Currently, we own two homes. Both are investment/rental property. We make rental income on both, both are duplexes. We have sunk in quiet a bit of money fixing up and repairing one of them. My husband is getting transferred and recently took a pay drop. I left my job to pursue my Master’s degree prior to this occurring. (Luckily my schooling is paid for) We have debts including 2 cars, a HELOC, a Personal Loan 2 maxed out credit cards, and 2 mortgages. Our debt has all accrued from fixing this one house. We recently checked the market and realized we have about 80,000 in equity in this home. If we sell we could pay off all the debt except the other mortgage (which the rent on one side covers monthly). We have purchased in an area where home values are going up significantly. We are debating between being debt free with a tiny bit of money left over, or holding onto it, paying down debt and expecting the market to continue to rise in this area. With both of our properties and the debts associated with them, it is about 42% of our pay. What would you recommend?