Being indebted is an extremely stressful situation. As you try to find your way out, interest rates might plunge you deeper into financial distress. This is an especially common problem in the United States, where 157 million people carry credit card debt, according to a study conducted in 2017 by CNBC. In a financial state where every day represents more economic loss and uncertainty about the future, many consider selling their homes as a way to get back on their feet. That course of action can certainly buy some breathing room in some situations, but circumstances must be carefully analyzed before putting the for sale sign on the front yard. By asking yourself a few key questions about your financial position you can estimate whether or not selling is right for you.
First things first
Before getting into details, you have to be honest with yourself about your ability to pay bills moving forward. If you live in a two-story house with a three-car garage and a hot tub but can barely make the mortgage payments, downgrading your living situation should be on top of your to-do list (you should sell). On the other hand, if you’re $25,000 in debt and have accumulated $190,000 of equity, maybe selling isn’t right for you. In that situation, the cost of selling your house would be almost half of your current debt, not to mention you’d be giving up your most valuable asset. If that describes your circumstance, getting a second job and slowly paying back the debt would be a wiser decision.
How much will you actually make from selling your house?
The amount of money you receive from selling your home isn’t necessarily its market value. What you will receive at closing is the equity in your home, substracted by the real estate agent’s commission (which is usually 6%), minus any closing costs paid in the transaction, as well as what you spent actually showing the property and fixing it up for the sale. Let’s say you have a $250,000 mortgage in which you provided a down payment of $50,000 and have a remaining loan balance of $120,000. If you want to sell that house to pay $90,000 of debt you could be left with less than $25,000 after the sale. Now you need a new place to live, which brings about the next question…
Are you ready to move out?
When dealing with debt, planning ahead is key. You should keep in mind that after selling it will be very difficult to qualify for another loan, and even if you did a mortgage might be too much to handle, so renting may be a better option. Before selling, you should know the rental rates in your area, whether or not you can afford them, and for how long. Changing your home more often than not also means changing your lifestyle, and in this situation switching to a less expense-heavy routine is more than sound.
Selling can be intimidating, and should not be done out of desperation or frustration. There are legitimate ways to evaluate whether or not selling your home is the right move, such as speaking to a finance professional. That said, it’s also important to know when to cut your losses, and you can save yourself some money by selling sooner rather than later if you’re deep in debt.