Should You Sell Your House to Pay Off Debt? How It Works and When It Makes Sense

Becoming a homeowner is usually a happy experience, but it can become bittersweet if you owe a large amount of debt. The amount you pay for your mortgage, on top of repairs, utilities, and insurance, can be a serious financial and emotional drag. 

Throwing your hands up and selling your house to pay off debt can seem like an attractive option—but is it really? For some people, it’s the perfect solution, while for others, it’s something to avoid at all costs. We’ll help you make sense of your options, so you know which side of the spectrum you land on.

Table of Contents

1. How does selling your home to pay off debt work?
2. Pros and cons of selling your house to pay off debt 
3. Should you sell your house to pay off debt?
4. What to do if you don’t want to sell your house to pay off debt 

How does selling your home to pay off debt work?

First things first: Not all home sales result in cash in your pocket when the dust settles. It’s possible not to have enough left to pay off your debt after you sell your home—or worse, to still owe money on a home you no longer own.

It’s important to run the numbers first to see whether it’s a financially viable option. Here’s what to check first:

1. How much home equity do you have? Equity is the market value of your home minus your mortgage balance—i.e., how much you’d get from selling your home. You’ll need enough equity to pay closing costs, taxes (if needed), other debts, and new housing. 
2. Will you owe taxes? If you sell your home for $250,000 or more than you paid for it ($500,000 if you’re married and filing a joint return), you may owe capital gains tax on the profits above this amount. 
3. Can you pay closing costs? Sellers typically pay closing costs out of the proceeds from their home sale, but the cost can be substantial, ranging from 6% to 10% of the sale price. 
4. Where will you live next? You’ll also need enough money to secure your next home, whether you buy or rent. Remember to budget for moving expenses, such as packing materials, hotels, and even time off work to get situated. 

If your estimates show that you’d still have money left after all that, compare it with your debt: Would you have enough to pay it all off? If not, how much would you be able to wipe out? Is selling worth the risk if one of these estimates throws off the whole calculation, leaving you with less than you thought you’d get?

Pros and cons of selling your house to pay off debt 

More than many other financial decisions, selling your house to pay off debt can be a polarizing choice. It’s an option of last resort for some people. But for others, it can make total sense and leave everyone far happier in the long run. Consider the following pros and cons to see which side you might land on:

Pros

• Less debt stress

• New financial and life opportunities

• Avoid further credit damage or bankruptcy

• Lower ongoing homeownership expenses

Cons

• Lose all your home equity

• High closing costs for sellers

• May owe taxes on home sale profits

• Lose out on potential appreciation in home value

• Selling and moving can be a difficult and emotional process

Should you sell your house to pay off debt?

Even if selling your home would wipe out your debt, it doesn’t always mean it’s the right decision. A home is the biggest source of wealth most people have, and—financial considerations aside—it’s also a crucial part of many people’s emotional well-being. 

These signs may point toward selling your house to pay off debt as a good solution:

• You’re not overly attached to your home.
• Your mortgage and homeownership costs are too high.
• Your income isn’t likely to go up much in the near future, nor your expenses decrease.
• You struggle to pay off your debt, but it’s not high enough for bankruptcy to be a viable option.
• You’d welcome a springboard into something new, such as moving closer to family or trying out van life.

I like to bring everything back to the basics. We need to look at household income and required expenses. Is it really a lack of income problem, or is it a discretionary spending problem?

Home expenses shouldn’t take up more than 30% of your income. This isn’t just your housing payment; it’s insurance, taxes, and saving approximately 1% to 2% of your home’s value aside for ongoing home repairs. 

If your housing expenses exceed this threshold (which is on the higher end), it may be time to downsize. 

Another factor is how much other debt you have between your housing costs and other debt payments. A good threshold to see whether you’re stretched too thin is whether your total payments between housing and other debts exceed 36%.

It’s also important to consider other alternatives. Is there a way to increase your income or reduce your expenses? If you sell your house, are rental properties at a price you can afford? Markets can vary greatly, so it’s important to consider all the different scenarios.

Crystal Rau, CFP®

If all signs point to “sell,” here are the ways you can do it:

Sell your home and move into a rental

Choosing to rent after you sell your home means you’ll have the most money possible left over to pay off your debt. The deposits on a rental are likely cheaper than putting a down payment on a new home, allowing you the best shot at a clean break with your debt. 

However, if you ever plan to buy a home again, you’ll start back from square one without any established equity to boost you. The good news is that as a renter, you may still be eligible for many first-time homebuyer assistance programs even though you previously owned a home.

Sell your home and buy a more affordable house

You don’t have to give up homeownership entirely. Buying a cheaper house allows you to keep building equity and growing your wealth, although you may not have as much money to pay off your debt after you sell your first home.

If you downsize to a smaller home, you can make faster progress because you’ll be spending less on your other homeownership costs. Having less room for storage can help you avoid unnecessary purchases and give you more time because you’ll have fewer household chores. 

Stay in your home and rent part of it out

It’s worth noting that you aren’t required to sell your house to pay off your debts. If you’d rather keep it (and your valuable home equity), consider whether renting a portion of it out might provide enough funds to help you pay down your debt. 

Many options exist for renting out your home while you still live in it. You could rent out a single room, for example, or partition it into separate living areas as an additional dwelling unit (ADU) or separate apartment. You can opt for short-term or long-term renters, or just list it on Airbnb.

Keep your home, rent it out, and move into a cheaper home 

If you can’t see yourself living with strangers—even with separation measures in place—you could also keep your house, move somewhere else, and rent out your whole home. It’s a delicate dance, but it’s also a common way for mom-and-pop landlords to get their start in real estate investing. 

Opting for this route means you can always move back in if you choose. But in the meantime, you’ll earn cash that can help you pay down debt and eventually provide a tidy passive income stream. That’s particularly true if you live in a high-demand area and have access to a cheaper place to live. 

What to do if you don’t want to sell your house to pay off debt 

If selling your house doesn’t feel like the right move, you have several alternatives to manage or eliminate debt without uprooting your life. Here are some of the most common options, along with insights into who they work best for:

Debt consolidation loans

Debt consolidation loans allow you to combine multiple debts into a single loan with a fixed interest rate and predictable monthly payment. This can simplify repayment and even lower your overall interest rate if you have high-interest debt, such as credit cards. 

These loans are ideal for individuals with a steady income and decent credit scores, as those factors can lead to better rates and terms.

Read More

Best Debt Consolidation Loans: Compare Rates 

Home equity loans or lines of credit

Using the equity in your home through a home equity loan or home equity line of credit (HELOC) can provide access to lower-interest funds for debt repayment. A home equity loan gives you a lump sum, while a HELOC allows flexible borrowing. 

These options work best for homeowners with substantial equity and a clear plan to repay the debt. Failure to repay could put your home at risk.

Read More

Best Home Equity Loans & Rates; Best HELOC Lenders & Rates

Refinance your mortgage

If you have good credit and your home value has increased, refinancing your mortgage could free up cash to pay off debt. A cash-out refinance allows you to take out a new mortgage for more than your current balance and pocket the difference. 

This strategy works best for homeowners comfortable extending their mortgage term and who can secure a lower interest rate.

Read More

Best Mortgage Refinance Companies; Best Cash-Out Refinance Companies

Credit counseling

Nonprofit credit counseling services can provide personalized advice and develop a debt management plan (DMP). In a DMP, the counselor negotiates with creditors to lower interest rates or monthly payments while you make a single payment to the counseling agency. This option is best for those seeking guidance and structure to repay debt over time.

Budget adjustments and side income

Before turning to loans or professional services, consider whether you can adjust your budget or increase your income to manage debt. Cutting unnecessary expenses or taking on a part-time job or freelance work might make a significant impact. This approach is best for those with smaller debts or who need a temporary financial boost.

Debt relief services

Debt relief companies negotiate with creditors on your behalf to reduce the total amount of debt owed. Typically, these companies require you to stop making payments to your creditors, which can lead to accumulating late fees and damage to your credit score. This approach tends to be best for individuals facing severe financial hardship who are unable to keep up with minimum payments.

---

Tip

Most debt relief companies—including those listed below—don’t assist with secured debts, including mortgages. This option might make sense if you have a large amount of unsecured debt—such as credit cards, personal loans, medical bills, and private student loans—that you want to settle to free up cash so you can continue to make your mortgage payments.

---

If you believe debt relief services align with your needs, it’s crucial to choose a reputable company. Here are the highest-rated reputable debt relief companies to consider:

Exploring these alternatives can help you protect your home and find a debt repayment strategy that fits your unique financial situation. If you’re not sure where to start, consider speaking with a financial advisor or credit counselor to understand the best option for your goals.

Also, consider renting out a room until you can get your debt under control. It’s important to pay attention to annual property tax increases. Don’t be afraid to go in and talk to your county’s appraisal office to see whether you can keep your property values the same or reduce them a little.

Crystal Rau, CFP®