Should You Own Your Home "Free and Clear"?
Almost 30 Percent of Americans Are Mortgage-Free
It wasn’t long ago when one of the best benefits of owning your own home were those home equity lines of credit you could get. In practice, this translated to a whole lot of fun for a whole lot of folks; new furniture and electronics, a pool, maybe even a new car or exotic vacation. And then ... POP!
Since the housing market crashed we’ve heard about how many folks are underwater in their homes. But now, statistical and anecdotal evidence alike suggest that more and more Americans are pursuing an entirely different approach to homeownership, aspiring to own their homes “free and clear.”
Just like every other financial decision, this one is highly personal and situational dependant. But generally speaking, if owning your home free and clear sounds like a financial strategy that might fit in with your own big picture plans, you’ll first want to weigh some basic pros and cons.
Topping the list for most folks in the “Pro” category is peace of mind. Plain and simple, it is not having to worry about a mortgage payment, and knowing you’ll always have a roof over your head if, for example, you lose your job. For a lot of folks, knowing they’re not paying their hard earned money to the bank in the form of interest is also a plus. But freeing yourself from a big mortgage payment also gives you more financial flexibility to do other things. Take other chances, for example, like maybe quit your job if the mood so moves you.
Included among the cons are tax breaks like the mortgage interest deduction you’ll be missing (the higher your tax bracket, the more tax breaks like this can matter). And with interest rates at historical lows, no one can argue that if you’ve got the self-discipline, time, and know-how, investing1 that money rather than paying off a low-interest home loan can make sense. But let’s be honest, very few folks actually have that sort of discipline, time and know how.
Last, if you’ll have to invest every last penny you have in order to own free and clear, you might be better off investing in several other places to diversify, and also keeping some cash handy for an emergency2. Your bank’s not going to give you that money back if you’re in a bind!
The bottom line is that more and more folks decide the pros outweigh the cons. Studies are now showing that almost 30% of Americans own their home free and clear. That’s 20.6 million households!
Will I Be Able to Pay Off My Home?
Several factors have been found to predict who will or will not choose to own free and clear. First and foremost is home values. There’s a direct correlation between how affordable homes are in a certain area, and peoples’ ability to get their mortgages paid off free and clear. For example, one of the highest rates for owning free and clear in the entire country -- almost 50% -- is in McAllen or Hidalgo, Texas, where the average home value is in the range of $75,000. Contrast that to Washington DC, for example, where average home value is closer to $400,000, and only around 8% of homeowners are able to pay off their mortgages.3
A second big factor we’re seeing is borrower age. Folks in that 65 to 85 age bracket top the list for being able to get their mortgage paid off. Almost 40% of homeowners in this group own free and clear. Reasons behind this include the fact that the longer you live someplace, the more time you have to pay off the mortgage, and older folks historically have more money saved for down payments and to pay off their home loan. Owning free and clear is also a priority for these folks as they near retirement4, but increasingly we are seeing younger folks starting to own free and clear as well.
Last is credit score. Almost 45% of all folks who own free and clear have a credit score in the 800 to 900 range. This particular factor can be likened to the question, “which comes first, the chicken or the egg?” Folks with the self-discipline to have a stellar credit score probably also have the self-discipline to get their mortgage paid off. And folks who manage to get their mortgage paid off generally wind up with a higher credit score. The point is, it’s good to be one of them!
If your goal is owning free and clear, any extra amount of money you have lying around can used to pay down your mortgage counts. In addition, if you can afford to make just a single extra payment each year, you can cut the time it will take to pay off your mortgage significantly. Check out one of the online mortgage calculators to see how quickly the dollars can melt away. Another way to accomplish the same thing, if your bank allows, is to pay half your mortgage every other week. If you haven’t already refinanced5 to take advantage of low rates, what are you waiting for? And if you’re serious about owning free and clear, then get serious about a 15 year mortgage6 instead of those 30 year mortgages that can outlive us!
Finally, check your household spending7 for other cost cuts that can be used to get that mortgage paid down! For example, can you have your real estate taxes reduced, or save money on homeowner's insurance or utilities? Those savings can be used to pay down your mortgage.
Shari Olefson8 is the author of the book FINANCIAL FRESH START: Your Five Step Plan for ADAPTING and PROSPERING in the New Economy.