Readers sometimes ask for my advice, as in today’s post. Although the advice I give might be worth what they paid for it, I strive to do my best. Following is a copy of an actual email (without names), along with my response. I would love to hear your thoughts on whether this family should sell their house to pay off their debt.
Letter from reader:
“Hi Joe, thank you for taking our question! Although I know we have been poor money managers we are now in our early 50’s, have 3 kids in college that are 100% loan funded, and about $40,000 in debt other than education. We have about $50,000 equity in our home. We are contemplating selling our home, paying off debt and renting an apartment for a couple years to get ahead.
We have approx. $1,000,000 in retirement, but are living paycheck to paycheck along with trying to keep our house updated and repaired in case we need to sell.
What is your opinion?
Thanks again for your time if you ever really see this e-mail yourself!
My response:
“I don’t think selling your home is a good idea because you would be circumventing your real problem: in your own words “poor money management”. Yes, you could do so and use that $50,000 to pay off debt, but unless you learn to manage your money, you would still be living paycheck to paycheck. I want to congratulate you on your retirement nest egg. Well done! But giving up that home equity could endanger that retirement. How? Because you should be planning to have a paid for house when you retire. Being at the mercy of a landlord or having huge house debt (assuming you buy another house) at retirement is not a good plan.
My guess is that you are paying huge amounts into a 401k, IRA or other retirement planning investment account. You might consider temporarily cutting back those contributions to only what you need to receive any 401k match from your employer, and use that bump in take home pay for debt reduction. If that debt happens to be credit card debt, you will make more on your money by paying it off than by continuing to invest it.
I don’t know the specifics of your budget, but you need to figure out how to live sacrificially, cut your life style and get that $40,000 debt out of your lives. Also, if you have signed up for the student loans, you need to figure out how to minimize the damages. Have kids attend community colleges or state universities, commute from home (if possible) and work like dogs to pay their own ways.
I don’t like student loan debt, but if it happens, it should be their debt, not yours. If they own it, they will (hopefully) figure out how to keep it down. At any rate, they have lots of options (scholarships, work, job co-op, laying out every other semester, military, etc.) and time to pay it down. You don’t.
You asked for my opinion, so here it is. I hope this helps.”
OK Readers: your turn. How would you advise this family?
Because I am in Mexico on a mission trip, I will not be able to respond to your comments for at least a week, but I look forward to reading them. Thanks!
It’s hard to know exactly what to do without all the details, but I would agree with Joe here.
Unless you can get an awesome premium for your home (probably tough in this market still) you might want to try to get ahead by slowing down retirement contributions for a few years and putting it towards debt – even if it takes 3-4 years to pay down the debt. Of course, your home may even sell for more in a few years if the market improves and you can decide if you need to make a change later.
As for college, encourage them not to ‘live on the loans.’ Find side jobs to earn spending money and use as little as possible to get through school.
Hope that helps,
Tim
Just from a very “overhead” perspective, I don’t think it makes much sense to sell the home, either.
For one, that essentially guarantees that the reader sells during a historic lull in home prices. I’m afraid that selling now and moving into a apartment means they just locked in what are only temporary paper losses.
There’s no way to know how much the home is worth, but if $50k is a sizeable chunk of the total value of the home, it would seem to me that a HELOC could be used to maximize the tax savings on the interest and consolidate some of those (presumably higher interest) debts.
Finally, tell the kids to buzz off. And definitely make sure that 1-2 years out of school, you are dropped as a consignor. If those debts are in your name exclusively…ouch!
I’ll advise you what I would do if I was in those shoes. My advice is stay in the house and dig out of the debt by budgeting and cutting back life style. I don’t understand how someone with $1,000,000 in savings could be in this situation. How did they manage to save that much and now be in trouble. Where did that money come from?
Will these students be acquiring more debt? Maybe they should pay for these debts. Mom and Dad have done enough.
There is a cost to selling your home! Commission and moving costs. You can never sell property quickly, so there is a cost while you are waiting to sell it too. Take a hard look at changes that you can make quickly. Definitely address how you acquired the debt and what changes you are willing to make to avoid this situation.
I would definitely not sell the house, especially not in a down market.
Instead, I suggest sitting down with your spouse and really, really creating a realistic budget and slash that spending. I agree with Joe too, don’t take on the debt of your children.
I think if you move, you will find yourself in a similar situation down the road. You have to address the core problem.