Should You Sell Your Home to Pay Down Debt?

You've made one of the biggest financial mistakes of all by running up thousands of dollars of credit card debt. And because of the cards' high interest rates, the debt continues to grow every month that you don't pay it off.

But there might be a solution — if you own a home. You can sell that property, take the proceeds from the sale, and pay off your credit card debt. It's a drastic solution. But if you have no other options for paying off your credit card debt quickly, selling your home might be a sound choice.

"If there is no light at the end of the tunnel, or game plan to pay it off, the best solution might be to sell your home and rent," said Peter Grabel, managing director of Luxury Mortgage Corp. in Stamford, Connecticut. "Over the last decade, we've learned that real estate doesn't always go up in value. Taxes go up, and there can be endless maintenance costs connected with ownership. For folks in this position, selling might be an attractive solution."

But before you decide to place your home on the market, realize that selling off real estate won't work for every person who is struggling with debt. In many cases, owners won't even make enough money from a sale to eliminate all of their high-interest-rate debt.

When Selling Makes Sense

For this plan to work, you must have enough equity in your home. If you owe $150,000 on your mortgage loan and your home is worth $220,000 in today's market, you could, in theory, expect to earn about $70,000 when you sell your home.

Fortunately, more homeowners today are probably in position to earn solid profits when selling their homes, said Joe Parsons, senior loan officer with PFS Funding in Dublin, California.

"As the housing market recovers from the crisis of 2008 and its aftermath, many homeowners discover that they have equity where before they had none," Parsons said. "Those who are carrying large amounts of consumer debt may find that they can sell their homes and become renters, using that windfall equity to retire the consumer debt."

Some Rental Markets May Be Too Pricey

While this might be appropriate for some homeowners, it won't be a good choice for many others, Parsons said. Once owners sell their homes, they are at the mercy of the rental market. Apartment rents are soaring across the country, especially in large metropolitan areas. This can make renting an expensive proposition.

"In many areas, owning a home, even at today's prices, is less expensive than renting an equivalent property, even without considering the large tax advantages that come with owning," Parsons said. "Rents will increase in the future."

Selling a home is expensive, too, and involves a long list of fees, most of which the sellers pay out of the proceeds of the sale. The largest of these is the commission that owners have to pay to their real estate agent, one that is typically 6% of a home's final sales price.

Parsons gives this example: If you owe $270,000 on your mortgage and you sell your home for $300,000, you might generate less than $15,000 cash on the sale after paying out commissions.

Other Debt Reduction Options

Greg Cook, mortgage consultant with First Time Home Buyers Network, said that he has worked with customers who did face enough consumer debt that they were considering selling their home. Cook said that he advised these customers to take other measures before giving up their homes.

"My advice to them has always been to 'stop the bleeding' as soon as possible," Cook said.

That's why Cook has recommended debt-management programs offered by reputable credit counseling agencies as a way for struggling homeowners to get their debts under control. In such programs, consumers work with an agency that creates a repayment plan for them, allowing them to repay all or part of their debt in monthly payments that they can actually afford.

Cook said that it often makes financial sense even for consumers struggling with debt to hold onto their homes. That's because if these owners want to one day return to the housing market, they will most likely be doing so at a time in which housing prices, and possibly interest rates, have increased.

If consumers do sell their homes to pay off their debt, they then need to take a close look at their bad financial habits to make sure that they don't run up their credit-card debt again, Cook said.

"Assuming they used all their equity to pay off the consumer debt, the next step is to initiate a long-term savings plan so they will have the funds required to buy a home in the future," Cook said.

While selling a home should be a last-resort plan, Cook said he has seen this move work out for some consumers. He points to clients who last year sold their home and used $78,000 to wipe out all of their consumer debt. These owners, Cook said, had been drowning in debt.

The clients were also military veterans. They were then able, using a VA loan, to buy a new home with no money down once they eliminated their debts.

"They, however, are an exception," Cook said. "Most families end up not being homeowners again for a long time."

Have you ever sold a home to get out from under consumer debt?

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