The Dirty Truth About Discipline : Pros and Cons of Owning Your Home “Free and Clear”

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 on their homes. But now, statistical and anecdotal evidence alike suggest that more and more Americans are pursuing an entirely different approach to home ownership: aspiring to own their homes “free and clear.”

The Pros and Cons of Owning Your Home “Free and Clear”

Just like every other financial decision, this one is highly personal and situational. 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, you don’t have to worry about a mortgage payment, and you know 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. You can take other chances, for example, like quitting your job.

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, investing 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 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. You should also keep some cash handy for an emergency. 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 21 million households! But is it the right decision for you?

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 people’s 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 the average home value is closer to $400,000, and only around 8% of homeowners are able to pay off their mortgages.

Age Matters

A second big factor we’re seeing is borrower age. Folks in that 65 to 85 age bracket top the list for being mortgage-free.

Almost 40% of homeowners in this group own free and clear.

Reasons behind this include the fact that the longer you live somewhere, the more time you have to pay off the mortgage. 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 retirement, but we are seeing younger folks starting to own free and clear as well.

Credit Score Can be an Indicator

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 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!

How to Pay Off Your Home

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 an online mortgage calculator 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. Additionally, if you haven’t already refinanced 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 mortgage instead of a 30 year mortgage. You’ll benefit from paying less money toward interest, too.

Finally, check your household spending 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.

S&P Case-Shiller: Home Price Growth Slows in July

Home prices dipped slightly in July according to the S&P Case-Shiller 20-City Home Price Index. Year-over-year, home price growth dipped to 5.00 percent from June’s reading of 5.10 percent. The Pacific Northwest led the nation in home price appreciation. Portland, Oregon had the highest year-over-year home price growth with a rate of 12.40 percent. Seattle, Washington posted year-over-year home price growth of 11.20 percent. Denver, Colorado was third with a year-over-year home price growth rate of 9.40 percent.

Home prices in San Francisco, California slowed; year-over-year, home prices grew by 6.00 percent in contrast to home price growth topping the 20-city index in recent months. Analysts observed that cooling home prices in San Francisco could represent the end of the area’s housing bubble.

Year-over-year home price growth was lowest in New York, New York with a reading of 1.70 percent. Washington, D.C. posted a year-over-year reading of 2.00 percent; Cleveland, Ohio posted a year-over-year home price growth rate of 2.50 percent.

MonthtoMonth Home Price Growth Provides Surprises

The largest month-to-month gains in home prices were posted by Portland, Oregon at 1.20 percent, Denver, Colorado with a reading of 0.90 percent and Detroit, Michigan with a July reading of 0.80 percent. While year-over-year home price growth readings are less volatile than month-to-month readings, signs of increasing home values in cities with depressed home price growth rates are a positive sign.

On the other hand, San Francisco, California posted a flat reading for month-to-month growth after recently topping year-over-year readings in the 20-City Home Price Index. With skyrocketing prices and limited inventories of available homes, it appears that San Francisco home prices may have reached their upward limit.

David M. Blitzer, Managing Director and Chair of the S&P Index Committee, said that July’s readings indicate further improvement of the economy and housing markets. This progress could prove difficult to sustain as house prices continue to outpace wages and rising home prices continue to sideline first-time buyers. Slim supplies of homes for sale are creating higher-than-average demand for homes that fuels rapidly rising home prices. This further complicates home purchase options for home buyers who compete with investors and others who are able to meet or exceed asking prices and purchase homes with cash.

Home buyers requiring mortgages have been supported by relatively low mortgage rates, but strict mortgage credit standards continue to provide obstacles for credit-challenged buyers. Financial institutions continue to take a conservative stance on mortgage lending after sustaining severe losses and government ridicule in the wake of the Great Recession.

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