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37% of American Homeowners Are Now Free and Clear


What a difference a decade makes. Back in 2009, it was a lot more common to hear about underwater mortgages than free and clear homeowners.

In fact, a Deutsche Bank analyst warned at the time that 48% of U.S. homeowners would owe more on their mortgages than their properties were worth.

Negative equity levels did indeed surge, thanks to plummeting home values and toxic zero down mortgages that allowed for negative amortization and interest-only payments.

But times have changed.

What Does Free and Clear Mean?

  • A homeowner with no outstanding mortgages on their property
  • Is considered to be “free and clear”
  • It means there are no liens or encumbrances on title
  • More importantly no additional mortgage payments are due!

A new analysis from Zillow revealed that nearly forty percent (37%) of American homeowners are now “free and clear,” meaning they don’t carry a mortgage at all.

That number is up from 29% back in mid-2012, when home prices were struggling to find a bottom and reverse course.

This is the result of paying off a home loan, either on schedule or ahead of time thanks to a prepayment or extra payments, including biweekly mortgage payments.

For those who took out 15-year fixed mortgages back in 2004 or so, they’d be free and clear too if they didn’t refinance or default during that span.

It’s also possible some of these homeowners paid cash up front and never had a mortgage.

Whatever the method, these homeowners are no longer borrowing money from the bank. And as such, the title to the home is free of any liens or encumbrances.

Remember, if you have a mortgage, you don’t really own your home, at least not totally. A lender has a financial interest in your property until its paid off in full.

Of course, this doesn’t mean you’re completely out of the woods. There are still a ton of costs associated with homeownership, even if you’re free and clear.

The old acronym PITI makes this abundantly clear; sure, the principal and interest portion are gone, but taxes and insurance remain, for perpetuity.

There’s also ongoing maintenance, monthly utilities, and so on.

But homeowners who expect to retire often pay off the mortgage in full, knowing they’ll be on a fixed income with less available to pay recurring monthly costs.

Why Are More Homeowners Free and Clear?

  • The housing crisis created a lot less mobility and an older homeowner population
  • Very low mortgage rates were engineered to spur a recovery
  • Fewer borrowers were able to tap equity thanks to stricter rules
  • Combination of these factors and an improving economy led to more paid off mortgages

It’s pretty simple, really. The worst housing crisis in recent history resulted in super low mortgage rates and a lot less mobility, which has led to tons of paid off mortgages.

While everyone was freaking out about the foreclosures and short sales riddling the housing market, many homeowners quietly paid their mortgage each month.

As noted, those who took out a home loan a decade or longer ago and stayed the course could be free and clear simply by continuing to make regular monthly payments.

And thanks to the record low mortgage rates on offer in recent years, some savvy folks refinanced into shorter-term loans like the 15-year fixed while barely seeing their monthly payment budge.

After all, if you could trade your old 6% mortgage in for a rate of 3% or lower, the combination of the lower outstanding balance and much cheaper interest rate could keep payments at bay.

You’ve also got an older population of homeowners, who haven’t gone anywhere for 30 years or longer.

Finally, virtually no homeowners tapped equity in recent years because underwriting guidelines got a lot tougher post-crisis, especially when it came to cash out refinances.

So very few homeowners were actually taking on any additional debt over the past decade, and instead paying it down.

This is great news for many retirees and older Americans who are now better positioned to use housing wealth to their advantage.

Of course, things can change in an instant, and it doesn’t always make sense to tie up all your cash in an illiquid asset.

Read more: Should I pay off my mortgage early?

Colin Robertson

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