Should I sell my house to get out of debt?

Financial discipline is key to make home equity worth every dime

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Dear Credit Guy
I am 70 years old, married, retired and in relatively good health, with a $5,000 monthly income (from Social Security and Federal Employees Retirement System). My house payment is $930 every month, with many years to go on the mortgage. We have no attachment to our neighborhood and would consider moving closer to our grown children.

Due to some really dumb thinking, I have zero assets other than the home. My credit rating is terrible. Due to a very “hot” real estate market, I have approximately $180,000 worth of equity in the house. I believe it would sell very quickly. I have $65,000 in debts, including unpaid taxes. I am not worried about leaving money to my kids.

My question is – should I try to hang on to the house and make the monthly payments for all debt (stressfully), or sell the house and pay everything off, even though monthly housing costs would probably double? I have two cars, one in good condition, and the other is on its last legs. I would use some equity money for a worry-free car (maybe about 2 years old).   – Marilyn


Dear Marilyn,
I believe the answer to your question lies in your use of the word “stressfully” in talking about hanging on to your house and making monthly payments on your debt. It seems you have given this matter a lot of thought. From the outside, considering your solution appears sound.

If you can sell your house for a net gain of $180,000, you would have $115,000 left after paying off your $65,000 debt. Here is how you could use that money wisely:

  • A good used car would probably cost you somewhere in the neighborhood of $15,000, which would leave you about $100,000 to make a new start.
  • You may benefit from talking with a fee-based certified financial planner at that point to determine the best use of these funds.
  • One thing I believe you do need to establish is an emergency fund with at least a portion of that money. Life events happen and usually come with a price tag attached. Having emergency funds is critical to ongoing financial health.

Fixed income and budget needs
Assuming you are correct and your monthly housing costs double to $2,000, you should still have $3,000 left over from your monthly Social Security and retirement income to take care of expenses.

  • I hope you will take the time to come up with a budget that does not include the use of credit as a way to extend your income. Because you are on a fixed income, this will be critical.
  • However, I would not suggest you close your credit cards once they are paid off. Closing accounts can hurt your credit score because it raises your credit utilization ratio and shortens your credit history, which are two factors in credit scoring.
  • Use your cards for things such as gas and groceries that you have already budgeted into your monthly expenses. This way, when the bill comes in, you will have the money already set aside to pay your charges in full.
  • Not only will you save money on interest charges, you will also see your credit score improve over time. Having a terrible credit rating may not seem all that important to you now, but it could certainly affect some of your future choices.

Car and housing options
Regarding your housing, you might consider renting if you can find something that suits you. Since you are not concerned with leaving anything for your children, you could forgo the hassles that come with homeownership by choosing to rent. This is, of course, a very personal choice, but if you have not thought about renting, now might be the time to explore your options.

As for shopping for a used car, you might look at the certified pre-owned market in your area. Many certified pre-owned vehicles offer generous warranties to help you avoid costly repairs because the last thing you need is a car that causes you problems and costs you more money.

Take care of your credit!

See related: Tough choice: Sell home to pay off debt, 7 things you never budget for (but need to)

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Updated: 04-20-2018