We inherited my mother's home when she passed away two years ago. The home is located in a ski resort. We tried short-term rentals with the home, but it has not worked out like we thought. We live in another state and have quite a bit of debt: 420k mortgage, car loan, and 20k of credit card debt largely due to auto repairs and medical issues. We are current on all payments, but I am considering selling the inherited home, which could fetch 500-600k. I would use the money to pay off all of our debt. I am wondering if this is a rash or foolish idea. The allure of being debt free is so appealing right now. Your thoughts?
Carmen Wong Ulrich Dec 11, 2013 Former Host
Rash or foolish? Absolutely not! You point out a big reason why owning a second home doesn't always turn out profitably: It's hard work to rent out the home and maintain it. For many folks, managing a second or third property turns into a second job — you certainly won't see me doing that anytime soon. The only reason to keep the home is to hopefully see it grow in value for you down the road, but the interest you're paying on your current debt likely outpaces the growth in equity on the home.
If you pay off your debts, even if it's just the car and credit card debt, you'll save around 14 to 20 percent (or more) in interest payments. Plus, you'll be able to aside a hefty emergency fund, and you'll have money to put towards retirement savings as well. You'll go from financially unstable to hopefully a continued path of building a steady net worth.
Be wary of paying off your own mortgage with this money. You don't want to get rid of so many eggs in one basket only to move all the eggs into another. Home-owning is a risk, particularly when you realize that it's like owning one big stock tied to a market that we have little control over. Treat it as such, and share some of that risk with your lender, as well as keeping the tax deduction.
Taking the 'egg' even further, consider that you have a bird-in-the-hand rather than two in the bush. By getting rid of your debt, as well as socking away some savings to act both as protection (emergency fund) and future earnings (retirement), you've killed two birds with ... well, I think you get the feathered picture.