Mar 28, 2024
There’s great news for America’s homeowners: A growing percentage now own their homes outright. No mortgage, no liens, nada.
In a November analysis of U.S. Census Bureau data, Bloomberg found the number of Americans in this category jumped between 2012 and 2022 by 5 percentage points to just shy of 40%.
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Moreover, Bloomberg reports that more than half of these owners have reached retirement age. So if you’re fortunate enough to be mortgage-free and headed towards retirement, chances are you have a lot going for you financially.
For starters, the worth of your home, should you choose to sell it, represents 100% equity. The bank owns none of it, and if property values in your area have jumped since you bought the place, it has turned in essence from a roof over your head into a storehouse of wealth.
Here's took a closer look at what a fully owned residence could translate to in dollars and cents.
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Hard-won returns
It’s important to note that homes don’t offer a return the same way traditional investments do. To reach the Land of the Mortgage-Free, you’ve likely spent years making payments where a lender got a big chunk of the money.
Assuming a dream scenario – $100,000 down on a $500,000 home and a 15-year mortgage at 2.5% – you’ve still given the bank roughly $80,000 in interest. That doesn’t include property taxes, repairs and home insurance, by the way. (You can run your own numbers at mortgage.org.
That said, the nationwide housing market has likely worked in your favor. Data from the Federal Housing Finance Agency shows that in the 15 years between December 2008 and December 2013, seasonally adjusted home prices in the U.S. more than doubled. With FHFA numbers as a guide, a $500,000 home you bought in 2008 might be worth $1.08 million today.
Your fully owned home’s ripple effect
Another way to determine what your paid-off house is worth centers on the ripple effect it will have on your retirement budget.
In simplest terms, take a $2,500 mortgage payment out of the picture and you've just reduced your annual expenses by $30,000. Now, factor that against the amount of money you’ll need to manage retirement: between 55% to 80% of your current annual income, according to Fidelity. When you own your home outright, you’ve just pushed yourself to the bottom end of that range, or perhaps even lower.
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Assuming you can pull the feat off before retirement, you now have the option of putting that extra money to work. Let’s say you pay off your home at age 60 and plan to retire at age 65. Using the above example of $2,500 a month, you’ve freed up $150,000 you could now invest over the course of that five-year period. Assuming an overall return of 7%, that becomes $160,500. Not a bad cushion thanks to having a house without a monthly loan.
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Downsizing in more ways that one
There’s one more factor to consider: the beauty of cashing out. Retirement fits hand and glove with downsizing and empty nests, and smart folks on the cusp of this life transition assess how to get by with less — as in less space, less stuff — and still enjoy life to the fullest.
In sum: You’ve paid off that $500,000 home that’s now worth roughly $1 million. You swap for a lovely townhome at $400,000, selling excess furniture and the like as you go. That new home is paid off, too (and still has space for your John Coltrane records, too).
The math is populated by encouraging numbers. A $600,000 gain from the sale; $2,500 less in monthly expenses; proceeds from selling off your excess possessions. You could even rent and say goodbye to high property taxes and the like. Then all that equity would be yours to work with.
You could become a millionaire if you weren’t one to start with. Pay off your credit cards and car loans while you’re at it, too.
Financially and from a peace-of-mind standpoint, that’s the value of home sweet home.
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Lou Carlozo is a freelance contributor to Moneywise.
