Economy
6:42 am
Mon April 18, 2011

Personal finance: What it takes to become 'mortgage-free'

In 1950, more than half of Americans owned their homes free and clear. No surprise that number has shrunk over the years.  But those who count themselves mortgage-free are still out there. The 2010 U.S. Census shows 1 out of every 3 homeowners owns their home free and clear. In a story produced for Marketplace Money, we look at what it takes to become mortgage-free.

Meet the Murphys

Mike and Kate Murphy live in a working-class neighborhood of Chicago, with two of their kids, Becky and Tommy, and their pet fish. They bought their charming, 3-bedroom brick house in 1996 for $156,000.

They originally started with a $110,000 mortgage. Mike Murphy says it was " obviously the largest mortgage we had ever taken out."

At the time, Kate brought in $30,000 a year, designing theater costumes part time. Mike was making $50,000 as a public school teacher:

At first they paid $1,100 a month on the mortgage. Refinancing dropped the payment to just under a $1,000. But they decided to pay a little more each month -- first $100, then $150 more.

Fast forward 13 years and they owned their house free and clear.

Living "Below Your Means"

Wondering how they were able to pay off their mortgage early? Kate Murphy says her family follows these two rules:

  1. They don't buy things they can't afford.
  2. They live a "little below their means."

That phrase – living below your means – is a big one in the Murphy household.  Their parents were Depression-era babies, and saving was a way of life. Kate Murphy remembers her dad’s regular advice: always have an extra $20 in your wallet and never spend it.

"Living below your means doesn’t mean you can’t live well…it just means you don’t give in to your "id" all the time. The only extravagant thing I part of a season ticket package to the [Chicago] Cubs. That’s the only extravagant thing that I have."

And beer. No Bud Light for this guy – he’s a Guinness man all the way. 

Still, they did have to sacrifice to pay down that mortgage. They rarely ate out or went on expensive vacations.   Kate Murphy still feels bad about not buying her kids a piano or getting them music lessons. And she and Mike put off their dream trip of going to Ireland on their 50th birthdays.

Is the sacrifice worth it?

Bob Van Order is a professor of real estate and finance at George Washington University:

"Owning a house free and clear and owning a house borrowing are actually very similar because you’ve got advantages either way."

On one hand, since the Murphys paid off their mortgage two years early, they saved about $13,000 a year in principal payments and interest.

On the other hand, Van Order says the Murphys missed an investment opportunity. Since you can deduct mortgage interest from your federal income tax, the Murphys basically had free money from their lender that they could have put in the stock market or some other kind of investment. Conceivably they could have made more money than they saved by paying off their mortgage early.

Of course, they also could have lost on a bad investment.

So Van Order says "it depends on what your alternatives are, but for a lot of people it makes sense to pay down your mortgage if you can."