Your debt load is so heavy it is consuming your life. Just when you feel there is no answer to your dilemma, you start eying the equity in your house. Pressured by the stress of your debt, you begin considering the unthinkable: selling your house to pay off debt.
Should you? The answer is “maybe”. Before making this decision, you need to back up and clearly understand why you are in the fix you are in. Start by asking yourself this 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 home or not, you need to:
1. 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.
2. Get rid of other debt. If car payments are dragging you down, get rid of your car. Give up eating out, vacations and satellite TV 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. If you explain to them what is going on, 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. Whereas the issue is not always black and white, the more clarity you have about the source of your debt, the better decision you will make.
Readers: Have you sold your house to pay off debt? How did it go? Any advice for other readers?
This post is adapted from a staff post I wrote for Christian PF.
I don’t have to pay for a house, I will finish my car payment next year. From what I saw in my short stints in the US is that people still have too many credit cards and use their overdraft option too lightly.
10 years ago, my first credit card, used to get my salary from the company I worked at, had this 50% of my wage overdraft option. You can imagine who went over the limit.
The good and bad thing was that, when I changed job, I had to also change the credit card. This forced me to pay off everything. That’s the bad and good thing, since it was pretty painful to pay all that money, but at least it taught me a very serious lesson.
All my credit cards since there have ZERO OVERDRAFT. I laughed few months ago, when Chase sent my first letter to confirm my account. I had a HUGE black border in the header which had “zero overdraft” written on it. And of course, they’d be more than willing to help with get the option 😀
So, I’d say, stop spending money you’re not having. If you cannot afford something, it means you cannot afford it. Small monthly payments are nice, but overall people take years to get off this debt, because they’re used to spend the money that’s not in their accounts.
As you said, get serious about finding out your problem. It’s not an easy task, it’s painful. But, once you really know what draws you back, you can take measures. If it’s a reckless spending habit, address it. If it’s a big house you don’t really need, get a smaller one.
This does require a lot of personal change, but the result would be good in the end. Since starting to take better care of my spending habits I can do more with my money, I can live off less than I used to, I can think about saving etc.
Very nice article. Yes indeed it’s better live your life doing money management. Live on what you earn. Very impressive article.
sell my house myself
@Ramona,
Good to hear from you, and thanks for the tips! I suppose, being as this is my site, it is OK for me to ask a “dumb” question, but I am trying to gain clarity as to how the Zero Overdraft Protection works on credit cards. Does this mean that if you charge more than your allowable credit limit, the charge will simply be denied? If so, I like this idea!
@sell my house myself,
Thanks. Living on what you earn is a good idea. Living on LESS than you earn is even better!
Take a hard look at your budget first before dumping your house.
Budgeting does not have to be difficult or time consuming. It has to be done. Sooner is better than later with budgeting so do it now.
You can even hire a Professional Budget Coach to do it for you.
What if the mortgage is 23% of monthly take home and tax & insurance are 14%? New Jersey stinks! My taxes have increased from $2000 to $7000 a year in 13 years!! I couldn’t move if I wanted to.
@Budgeteer,
Right. Making a budget was my number one point.
@Kathleen,
Wow. That is a load for taxes and insurance! Good thing your mortgage isn’t any more than it is, but it is a bummer knowing that you will still have huge payments even after you get your mortgage paid off.
Your house – Unless youve got a really sweet Ferrari your house is probably your largest investment and expense. Here are a few strategies you can use to either get more home on your budget or lower your house budget and still get the same size and quality home. You can find a realtor that works with foreclosures or search for pre-foreclosures on your own.