Downsizing my house to pay off debt; what do I need to consider?
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Can I sell my house to pay off debt?
As long as the value of your house is enough to pay off all the debt and leave you with enough to live comfortably afterwards, downsizing is a viable option.
Struggling with debt is extremely common, and many homeowners have looked into downsizing to try and alleviate their debt. Whilst this can be really beneficial to some, it may not be the right choice for everyone, so you need to make sure you know all the possibilities before committing.
What do I need to downsize?
You’ll need to be able to sell your current property and have enough funds to buy something more affordable. This process is much easier if you have a low mortgage and a high credit score, as this will give you the best chance at being accepted for another mortgage.
If you’re still paying your mortgage and there’s a good chunk still left, you need to make sure that you have enough home equity to sell your property, cover the down payments for a new one, pay all of the fees involved in moving and be able to pay your debts off in full.
What are the challenges of downsizing?
It can be hard securing a mortgage for a new property whilst your name is still on your current mortgage. You will need to have a good credit score and enough finance to assure the lender that you’re able to handle a second mortgage; even though you’ll pay off your current mortgage when you sell up, it will appear that you’re paying two mortgages which will mean your affordability will need to be high.
You may decide that downsizing is the right choice, find a new house, and then find when you put your house on the market that is isn’t worth as much as you expected. This can cause huge problems as if you’re downsizing for the debt you want to pay off your debt in full, not just cover part of the value. In this case, you may need to consider a flat rather than a house.
What else should I do before I downsize?
It’s really important that you scrutinise your finances and spend some time checking what impact can be made from reducing your monthly living costs. If you are able to manage your money better, that could make a huge difference and allow you to find something more spacious when downsizing. It will also ensure that by downsizing you’re moving in the right direction with your finances; if you downsize but still overspend each month on utilities and personal spending, it will be a waste of your time and money. Take some time to list your income and your outgoings each month and see where you could save yourself some money- you’ll likely surprise yourself.
What is the cost of downsizing?
Put simply, downsizing is not cheap. There are taxes to pay, along with legal fees, moving costs and any redecorating or renovations that your new house may need once you’ve moved in. You need to consider if the upfront costs are going to be affordable for you and make sure that they will be worth it in the long-term so you’re not adding to your debt.
This can often be entirely dependent on your current mortgage; if you’ve paid off the majority of it, it will be more beneficial to downsize as you won’t have too much of the mortgage to pay, so you can focus your funds from the house sale on paying off your debt and buying a new house.
You should also look at the cost of living adjustments that you’re likely to face, as these long-term can also ease debt and put you in a stronger position going forward. If you’re currently living in a 4-bedroom house and only using one of them, downsizing could save you a significant amount on your heating bills through the winter.
This is completely dependant on you, but there are times which downsizing becomes a more prevalent option in life. If you’re coming close to retiring but are struggling with debt or have a large mortgage, downsizing is often favoured as a way to clear debt and make your retirement easier and more enjoyable.
Downsizing can be a great option, but make sure that you take the time to know that it’s the right decision for you. To get an idea of what your house is worth and see if this is something that could be beneficial to you, visit We Buy Any House today for a free offer on your property.
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