Mad_About_Money_final Mad About Money_Dec 2016 - Page 16

MadAbout MadAbout Money Money I f your debt situation is very bad, you may even have to sell things that you need, like your car, your jewellery, furniture, air-conditioners, music-system and other household items. WHAT ABOUT YOUR HOUSE? Do you include that in the things that have to be sold to clear your debts? A home has a lot of emotional value for the owner. It is not very easy to sell something that you are so attached to. If you have the means to pay off your EMIs and other loans by just cutting down on expenses in a few areas, then hold on to your house – do not sell it. Find other sources of income if need be. IS IT OKAY TO SELL YOUR HOME TO PAY OFF YOUR DEBTS? Though not always the best option, selling your home to make repayments on your debt makes sense in maybe two scenarios. What do you do to pay back your debts? How do you repay the money you have borrowed at different times for your various needs? 1. One way is to work harder and earn more – this could mean taking on another job, or working longer hours in jobs that pay overtime wages. 16 2. Another way is to spend less – on food, on travel, on clothes, on holidays and other things that are not essential. 3. A third way is to sell things that you own which you can do without. Scenario 1 IF THE EMI IS VERY HIGH If the EMI’s on your house-loan are very high, then you will have very little money left to pay off your other loans. Ideally your EMI on the house should not be more than 25% of your take home pay. If it is higher, then you will be left with insufficient funds to manage your monthly expenses and also pay back your other loans visa car loan, education loan, etc. In such a situation it is probably better to sell your house and use the proceeds to pay back your other loans or at least a large part of these loans. That will reduce your debt burden considerably. With what is left after paying back your loans, you can either make a down-payment on a smaller or less expensive house or you can rent a place to stay and save up to buy a house later. What happens is that instead of taking years and years to clear off your debts, you can pay back your loans in a shorter period of time and then think of investing in real estate all over again. Scenario 2: IF YOU ARE THINKING OF SHIFTING Suppose you are shifting base and going to another town/country, then you may consider renting out your house or selling it. Either way you will get funds in your hands. If your monthly rental is sufficient for your EMIs and other loans and for house-tax and maintenance, then do not sell. If not, then take a look at the value of your property and do a little calculation. Deduct selling costs (broker fees, tax, interest admin charges etc.) from the market value of your house to get the amount you have in hand. If this is greater than your debts, then sell your house and use the money to pay off your loans. Keep aside some money for emergency and invest the rest in property such that you can afford the EMI’s. Each individual’s case is different so do these calculations before you take the final step of selling your home. 17