Sell Your House to Pay Off Debt: A Guide

Americans have a lot of debt: just over $100,000 per person, on average. To eliminate this significant debt, some might invest in debt consolidation tools while others resort to personal bankruptcy. But there’s one way to pay off debt that you might not have considered, even though it’s right under your nose. Selling your house to pay off debt, while seemingly unconventional, can be an effective way to clear debt and begin anew. 

But just because you can sell a house to pay off debt, should you? Read on as we explore the pros and cons of selling your home to pay off debt. 

Top 3 Benefits of Home Selling to Reduce Debt

First, let’s explore the benefits of selling your home to reduce debt. 

1. Immediate Debt Relief

Debt left unmanaged can feel like a snowball rolling downhill, gaining size and momentum every time a billing statement closes. While making more than the minimum payment can keep this debt from getting entirely out of control, high interest rates can make debt management feel impossible. 

When you sell your house to pay off debt, you’re no longer fighting against the momentum of high interest rates but instead stopping them dead in their tracks. This immediate debt relief can save you hundreds or even thousands of dollars in interest payments over time. 

2. Reduced Financial Stress

In the American Psychological Association’s 2023 study on stress, over 60 percent of respondents aged 35 to 64 cited personal finances as their primary source of stress. If you’re one of these people—or at least share this stressor in common—selling your home can be an effective way to reduce (or eliminate) financial stress, improving your overall financial situation.

The same study examines the outsized impact stress can have, from introducing unhealthy coping mechanisms to placing unwanted stress on personal and professional relationships. While there are countless ways to achieve stress relief, selling your home may be the best way to alleviate financial stress. 

3. Potential Credit Score Improvement

Selling your home to pay off debt can be a quick fix, quieting your immediate stressors, but it can also have a lasting impact: potentially improving your credit score and positioning you for a better financial future. By dramatically reducing your debt-to-income ratio, you may be able to watch your credit score jump significantly, giving you an added advantage when it comes time to purchase your next home. 

Top 3 Drawbacks of Selling Your Home to Pay Off Debt

Of course, selling a home to pay off debt involves a few sacrifices that may outweigh the benefits. 

1. Loss of Property and Equity

The biggest of these sacrifices is the loss of valuable home equity. Many Americans believe their home is their biggest source of wealth, and selling a home to pay off debts can mean losing this wealth. Forfeiting this wealth to reduce debt can pay off in the long term, but in the short term, it may feel a bit like robbing Peter to pay Paul. 

2. Moving, Relocation & Closing Costs

Selling your home is far from free, and the cost of selling your house to pay off debt may take a chunk out of your home equity. 

At the close of your sale, you’ll be responsible for things like taxes, real estate agent fees, potential seller concessions, and other seller closing costs. Depending on your area and current market conditions, these closing costs can amount to thousands of dollars—deducted straight from your sale proceeds. Add these to moving and relocation costs, and the amount left over to pay off debts may be smaller than you anticipated. 

3. Possible Tax Implications

Depending on how much value your home has gained since you bought it, selling to pay off debt may put you in an unexpected tax bind. Real estate capital gains tax impacts single, exempted sellers whose homes have gained more than $250,000 in value or married sellers whose property has appreciated $500,000. So, if you got a great deal on your property and have since watched it double in price, selling to pay off debt may end up costing you due to capital gains tax. 

Explore more on capital gains tax on home sales and how it can impact you as a seller.

Deciding if Selling Your Home to Pay Debt is Worthwhile

Selling your home and putting the proceeds toward debt repayment can be an effective way to get out from underneath significant debt, but it’s not the only way. You can pick up extra hours at work or take on a side hustle. You can sell off unused belongings, like golf clubs that are gathering more dust bunnies than birdies, spare furniture you’ve long been saving for a reupholstery project, etc. You can even sublet a portion of your home to cover the costs (and then some). 

But there are certain circumstances where selling your home to pay off debt can be the clear right path, helping you accomplish multiple goals simultaneously. 

Your Mortgage is Too Big

If your mortgage payment is already too big, selling your home to pay off debt can serve two purposes: freeing you from a massive source of debt while helping you tackle other, smaller debts. Without both of these sources of debt, you can downsize to a smaller house (and mortgage payment) or remain debt-free as a renter. 

Remember that this approach will be most effective when you’ve already accrued substantial equity in your home. Ensure that your equity is enough to cover your debts and leave you with a cushion to empower your next move. 

You Were Already Planning to Move

Selling your home to pay off debt may also be worthwhile if you are planning to move or in the process of moving already. Instead of rolling your sale proceeds into a similarly priced property, you can take this opportunity to downsize or rightsize while using the remainder of your home equity to tackle debt. 

For many homeowners, the advantages of selling their homes to pay off debt may not be reason enough to pursue this strategy. However, if selling their homes will serve their goals in more ways than one, this may be an added perk. 

Steps for a Successful Sale if You Decide to Sell

If you do decide to sell and plan to use some of your proceeds to pay off debt, you’ll want to take extra steps to ensure the sale goes smoothly—and that you walk away with as much equity as possible. 

1. Work with a Real Estate Agent

Real estate agent commissions can cut into your sale proceeds, with some sellers opting to assume the responsibility themselves and pursue the for sale by owner (FSBO) approach. But while this may help you avoid hefty fees, it may cost you more in the long run. Consider that real estate agents help homes sell faster and for more money, and this strategy begins to seem like the better option.

Working with a professional can also save you precious time. A skilled real estate agent will help you market and stage your home, ensuring it makes the right first impression with more potential buyers. Additionally, working with a qualified agent can protect you from potential real estate scams. With this responsibility off your plate, you can focus on developing a strategy to get out from underneath your debt. 

2. Sell at the Right Time

Timing is a determining factor in the success of home selling. Sell during the wrong season (or under the wrong market conditions) and the process could span months and net you a suboptimal result. List your home at the right time, however, and your home could get snatched up in days—for far more than you’re asking for. 

By and large, spring and summer tend to be the best times of year to sell a house. Should these seasons align with seller-friendly housing market conditions in your area, you may find you’ll be able to tackle more of your debt payments than you ever expected. 

3. Plan Your Next Move

If you’re selling your home to pay off debt, you have a plan for your sale proceeds. But what’s your plan for future housing? Are you planning to move into a smaller home, rent for a while, or stay with family? These are questions to consider as you begin the home selling process, and their respective answers can be costly. 

Selling your home can be the key to eliminating your personal debt. But without a well-planned next move, you may find yourself taking on more debt to temporarily house your belongings while you shop for your next home—not to mention paying for multiple sets of moving costs. 

Using your home equity to pay off outstanding debt is a strategic, multi-step approach. Before embarking on this journey, make sure you’ve given careful thought to each step so you can make your next move with poise. 

Alternatives to Selling Your Home for Debt Repayment

If you’re looking to access many of the perks of selling your house to pay off debt without some of the disadvantages, you’re in luck. There are other ways to accomplish your debt repayment goals. 

Home Equity Loans and Lines of Credit

Home equity loans and home equity lines of credit (HELOCs) allow you to borrow money against your home equity, effectively letting you draw from the equity you’ve accrued. With a home equity loan, funding is doled out in one lump-sum payment. A HELOC, on the other hand, enables you to withdraw money from a line of credit.

For the purposes of debt repayment, a home equity loan may be the better option over a HELOC. However, before you proceed, it’s important to understand what disqualifies you from getting a home equity loan. But if you want to explore each of these options in detail, consult our in-depth article comparing HELOCs and home equity loans. 

Personal Loans

When you take out a personal loan to pay off your debts, you’re basically fighting debt with debt. However, if you manage to secure an interest rate significantly lower than the rates on your other debts, this may be a more manageable way to pay it down. Personal loans can be especially useful if you have debts that are bordering on (or already) delinquent, helping you avoid the fees and credit impact that can come with past-due payments. 

Refinancing

If both your credit and the housing market have improved since you bought your home, refinancing may be another approach to help you pay off your debt. A cash-out refinance, for example, allows you to trade your mortgage for a larger mortgage, pocketing a portion of your home equity which can be used to clear your other debts. If you’re still unsure if this is the best option for you, consider exploring our article on what a cash-out refinance is to better understand how it works.

If your goal is to get rid of high-interest debts, this approach may be right for you. However, if you’re hoping to reduce your overall debt, taking on a larger mortgage is far from the best way to do so. 

Debt Consolidation or Settlement

While the constant emails, phone calls, and pop-up ads about debt consolidation and settlement can get annoying, these strategies can help you get a handle on your debt. If you use a reputable service, that is.

Debt consolidation services help people roll several smaller debts into a single one. This can make debt easier to manage while also reducing the amount owed in interest. Debt settlement, on the other hand, is generally reserved for when outstanding debt has gotten out of hand. These services will negotiate directly with lenders on your behalf, with the goal of reducing your total debt (and putting a stop to calls from debt collectors.) But while debt settlement can get the debt-reduction job done, it comes at a cost beyond the service fee — impacting your credit score for potentially several years. 

Sell-and-Stay with Truehold

If you don’t want to take on more debt to pay off your existing debt, or face a credit hit that could take years to recover from, Truehold’s sell-and-say transaction may present an exciting alternative.

With Truehold, you sell your home just as you would in a traditional sale. However, instead of having to roll your equity into the purchase of a new property, you can stay put. You’ll pay monthly rent instead of a mortgage while you tackle your debts and plan your next move on your own time.* 

Should You Sell Your House to Pay Off Debt?

Selling a home to pay off debt isn’t for everyone. And while there are clear benefits to this strategy, some find that the pros simply don’t outweigh the cons. If you’re already thinking about moving, or if you’re looking for alternative options to pay off debt, selling your home may be the right move, and Truehold’s sell-and-stay transaction can be the best way to do it. 

Contact Truehold today to learn more about our sell-and-stay transaction and see if this option serves your goals. 

Disclaimer*: After the home sale, you must comply with the terms of your lease to continue living in the home. This includes making timely payments on your rent for your minimum lease term (which ranges from 6 – 24 months).

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Sources:

1. Business Insider. Average American Debt in 2024: Household Debt Statistics. https://www.businessinsider.com/personal-finance/credit-score/average-american-debt

2. American Psychological Association. Managing your stress in tough economic times. https://www.apa.org/news/press/releases/stress/2023/collective-trauma-recovery

3. Bankrate. Do you need a real estate agent to sell a house? https://www.bankrate.com/real-estate/do-i-need-an-agent-to-sell-my-house/ 

4. NerdWallet. What Is Debt Settlement and How Does It Work? https://www.nerdwallet.com/article/loans/personal-loans/how-does-debt-settlement-work 

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