If you are a homeowner and land yourself in a great deal of debt, you could use the equity from your home in order to pay off what you owe. However, this comes with many different factors to consider and also potential risks. Before deciding to opt for this method of debt consolidation, make sure you know the implications and the different alternatives.
This guide covers everything you need to know about selling your house to pay off debts, how to do so, and whether is best for you based on your personal and financial requirements.
Why Would You Sell Your House to Pay Back Your Debt?
Selling your property in order to pay off your debts may seem like a logical idea if you own your own home, as any equity you have will be tied up in your property. Freeing up this equity to use as cash could be a good idea, especially if you are facing a large amount of debt that you are struggling to pay off.
What Should You Consider Before Selling Your House to Pay Off Debt?
Before selling a house to pay off debt, it is important to consider alternative options and all factors. Find below some key questions to ask yourself before selling your house to pay off debt.
1. What Is the Market Value of Your Property?
You will need to know how much your home is worth in order to determine how much equity you would be freeing up. Your property’s market value, minus your remaining mortgage balance, is the amount of equity you have.
2. What Type of Debt Do You Have?
As a logical first step, you need to work out how much debt you actually owe and to whom. Before going down the drastic route of selling your home, you may be able to restructure or minimise your debt. For example, with some debts, you may be able to negotiate a new repayment agreement with your lender.
3. How Much Will It Cost to Sell?
Selling your home can be an expensive and laborious process. After you have paid for estate agents, conveyancing, solicitors and any repairs that need doing, you may have worsened your debt substantially. Before deciding to sell your home as a debt solution, consider whether you can afford the costs of selling in case the sale of your property falls through. Also think about whether the profit will be enough to justify the costs.
4. Is It Wise to Get Off the Property Ladder?
It can be difficult to get your foot on the property ladder, especially in the current property market. Therefore, leaving the security of the property market may not be a good idea as you could decrease your chances of getting another property in the future.
5. Is This a Reasonable Long-Term Debt Solution?
Think about your overall financial situation and decide whether your financial troubles are short-term or something more deep-rooted. If you are having long-term financial problems, using a property sale as a quick fix may not be advisable.
6. How Long Will It Take?
Selling your home is not always the quickest process and has multiple stages. If you are trying to pay back your debt urgently, this may not be the best solution as you cannot guarantee how long it will take to sell and whether or not it will sell at all.
Is It a Good Idea to Sell Your House to Get Out of Debt?
Selling your home as a solution to paying off debt could be a good idea but depends on multiple factors. Depending on the type of debt that you have and how much you owe, there may be better alternatives that are less permanent than selling your property.
Think about what happens after the property sale. For example, where are you planning to live if you sell your home? Are you planning to rent? Will you have enough money left to buy another property, and if so, how easy will it be for you to re-enter the property ladder?
Once you sell your property, the first debts to be paid off will need to be property-related debts such as your mortgage. Only after that is paid off can you use any remaining profit to repay your other debt. Subsequently, before using this strategy of debt consolidation, you will need to consider how much money you will actually be making from selling your home and whether or not it is enough to cover all your debt and still leave you with enough money.
