Does it make sense to sell our house to get out of debt?

My wife and I are in our early 40s and we are living pay check to pay check, despite the fact that we make a combined gross family income of $140,000. This is embarrassing to admit and we realize that we need to make some drastic lifestyle changes.

 

A few years ago we took out a home equity line of credit, which we tapped into for some home improvements as well as to consolidate credit debt. The line of credit was also used as overdraft protection for our checking account, which was a big mistake. Essentially, our line of credit ended up being a seemingly bottomless ATM machine.

 

Today our line of credit is maxed out at $106,000 with a monthly payment of $800. The balance on our mortgage is $236,700 with a monthly payment of $1700. Other debts include a MC with a balance of $20,000; three cars loans with balances of $23,000 (payoff Oct. 2011), $6,800 (payoff May 2011), and $2,000 (payoff in June 2008); a line of credit balance of $7,400; and a couple of department store credit cards with a combined balance of $2,000.

 

We have two children, ages 15 and 10, for whom we intend to fund college. While we have been investing in a 529 savings plan, we know we are not setting aside nearly enough to meet future financial obligations. Same is true for our retirement savings. Personal savings is nil.

 

My feeling is that we are so far in over our heads that it would be prudent to sell our biggest asset – our house – and use the proceeds to get out of debt. We could rent a comparable house in the same area for about $1,500 a month. In today’s real estate market, our house should sell for about $420,000, which would result in a profit of $77,300 after paying off the mortgage and home equity line of credit. Less a 6% realty commission and capital gains taxes, I believe we would be left with about $37,000, which could be used to knock out all of our outstanding credit debt except for the car loans. We would then sell our third car that has a balance of $6,800,resulting in our only debt being one car loan.

 

At this point, I feel that we would be in a position to be able to put aside significant savings for our children’s college fund, a future house down payment, our retirement, and an emergency fund.

 

Does this make any sense at all or am I missing something?

I wouldn't go that route.  It may seem like it would give you a good jump start, I don't think it would be a good long term solution.

Say you get the full $420,000 you're asking and don't end up settling for a lower offer.  You'll pay $25,200 in real estate fees leaving you with $394,800.  You mentioned the capital gains tax on your house, but not what percentage of the 420k would be subject to that.  My guess would be that will cost you a couple tens of thousand more.

After paying off your mortgage and home equity loan that leaves you with $52,100, not $77,300 and that's before capital gains.  

The interest on your mortgage and line of credit should be tax deductable.  That's between $5k-10k more you'll have to pay in taxes each year.

Plus your house is more than half-way payed off by now (by time, not value).  10 years or so from now you'll have no house payment on the current track vs paying $2,000 a month + in rent (it will go up).

You mentioned wanting to have more money to put away towards a 529 plan and other savings.  These are usually fairly conservative investments, and the 3-5% gains your likely to see from that investment each year, isn't going to come close to offsetting the 12%-24% you're likely paying on those credit cards and other debt.  I hate to say it, but I think you'd be better off putting that money towards paying off your debt currently and take out another loan when it's time to pay for college.

So what to do...

Selling the car is a good start.  Use any extra money from that and the amount you're no longer making in payments to pay down your highest interest debt.  If you have anything at excessively high rates see if you can refinance for a lower rate (short of using your house as equity).  But don't take the lower payments as extra spending money.  Continue to pay the same higher payments in order to pay down your debt faster.  And of course limit your spending.

Hopefully this will provide you with a start.  We can see where to go from there if you still have questions.

if you sell your house....what would you do? you`ll have to buy another house or rent something and you`l get to the same problem because you`ll have to pay every month....i have to agree with Jeremy and say that you should sell one of your cars...maybe two and try to manage with one car or take the public transport for a while untill you get on your feet again.

If you have your 2nd house. Its fine if you sell your first house. but if you only 1 house and you live at that place and you sell your house to pay your debt. So, whats next? Where you will live and if you have some kids, how they will going according to that position? I don't think that really a good idea unless you live alone and not married yet. Try others method, sell your house is not best method unless you never found any good way to settle your problem.

I'd keep the house and work on fixing the spending problems you have instead.

After all - if you sell to get out of debt now, you're only going to find yourselves in a similar situation in a couple years because you never fixed the spending problems in the first place.

Sell the cars. Do you really need THOSE cars? Or could you do with smaller/cheaper/slightly older ones that get to the same place in the same time with a smaller price tag?

Do you really need department store credit? Or is lay-away available. Lay-away is like forced savings and it's interest free. If you REALLY need stuff from department stores, like school clothes etc, then PLAN for them and use lay-away.

 Lose the credit habit and keep your house.

I agree with Raven.  It's your lifestyle and spending habits that have got you into this situation.  You must change your behaviour first, not just you personally, but your whole family, wife and kids included.  I'll bet you are not the only one in the household who enjoys living beyond their means.  Explain to the kids that some things will have to be curtailed e.g. takeout, brand name clothing, some of the more expensive outings etc.  Sit down as a family and work out a budget, then stick to it.

Selling your home to finance spending on consumables and assets that depreciate like motor vehicles is not the solution.  You would still have to rent something, and your rental payments would not be working to create an asset like your mortgage payments do.

Try some behaviour modification strategies, and look at this situation as a challenge to be overcome, and not a financial disaster.  If you handle it with a positive outlook, your family will be closer and you will be more able to cope with adversity.

 

 

Selling the house would, for me, be the very last resort. If you can see no other way. or cannot make enough lifestyle spending changes, then you will ultimately have to sell.

However I would seriously try and look at other ways you can make changes, make selling the house the very very last option.

My family is in an very similiar situation, what did you decide to do?

I disagree with everyone telling you to keep the house.  I'd sell that baby and knock out as much of the intrest-sucking debt you can, as soon as you can.  Find MODEST place to rent while you start to rebuild your savings.  Don't try to rent something comparable to the house you just sold as this wasnt something you could afford in the first place.  Get something that is what you NEED, not necessarily what you WANT.  You would, at this point, have less square footage to heat and cool, not have to worry about property taxes, homeowners insurance, homeowners association fees..ect.  Having knocked out most, if not all, you credit debt you should be able to start saving a nice chunk of your combined income each month using a budget.  Just make one that comprises only necessary spending and stick to it!  Once you get enough for a nice down payment on a new house (not needing to be remodeled) that is more economical with a fixed intrest rate, you can make your move.  Managing debt IS NOT ever better than eliminating debt I dont care what people say.  Dont live beyond your means.  Who cares what the Jones' house looks like or what car they drive. More than likely the Jones' are gettting in just as much debt as you are, if not more.  Live for your family not anyone elses.  I commend you for considing selling your house.  Dont like the "credit junkies" convince you otherwise!

I agree with john. If selling your house will wipe up your debts entirely, then do so. Start over again, re-think your priorities and plan for your future. Nobody goes anywhere without a plan. Be wise enough not to get in the same situation again.