The mortgage-free life
The Murphys at a Cubs game, one of the family's few "extravagant" purchases.
Tess Vigeland: The Freemans are in the majority of American home owners who don't actually own their homes. Most of us are only part-owners, along with our best buddy, the bank. The number of Americans who own their homes outright has changed over the decades. In 1950, more than half were free and clear of a mortgage. Now, as Jennifer Guerra tells us, it's far less than that. But she did find some.
Jennifer Guerra: According to the 2010 census, one in three American home owners is exactly that -- they own their homes free and clear. With numbers like that you'd think it'd be easy to find someone's who mortgage-free. But when I posted a search on Facebook, I got answers like: "LOL" and "Hope I live that long" and "I'm your man in 29 years!"
But with a little more digging, I came across the Murphys.
Sound of door knock
Mike Murphy: Hi!
Meet Mike and Kate Murphy. They live in a working-class neighborhood of Chicago with their kids -- Becky and Tommy -- and their pet fish.
Becky and Tommy: Flo, Chico and Toger.
In 1996, a week after Becky was born, the Murphys bought a charming, three-bedroom brick house for $156,000.
Mike: We originally started out with $110,000 mortgage. And 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 thousand. But they decided to pay a little more each month. At first $100 and then later, $150. Before buying the house, they made a pact to pay it off early so they could get a head start on saving for their retirement.
Thirteen years later, they owned their house free and clear. To celebrate, they invited 20 of their closest friends over, grilled some steaks, popped the champagne and burned the mortgage.
Mike: We brought the papers out and we really did set fire to them. It was actually a lot of fun. We have a picture to actually prove we did it!
Guerra: Are a lot of people that you know, a lot of your friends or family members, in the same boat -- they're living mortgage free? Or are people jealous?
Kate: People are jealous. When we posted our pictures on Facebook -- you know, of the mortgage burning party" -- we got "oh so jealous" comments from people I happen to know have more income than we do. But I wouldn't trade making more money for having a mortgage that's paid off.
Mike: Yeah, we have no debt.
Kate: None, no credit card debt. We own our cars, we own our home. So, yeah, we're... I'm sure half of America, when they tune in, "How did they do that?" We just don't buy things that we can't afford. And we live a little below our 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.
Mike: Living below your means doesn't mean that you can't live well. It just means you don't give in to your id all the time. The only extravagant thing that I have is part of a season ticket package to the Chicago Cubs.
Kate: Gotta have your Cubs tickets! Seriously!
Mike: That's the only extravagant thing that I have.
And beer. No Bud Light for this guy. He is 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.
But was all the sacrifice really worth it in the long run? To find out, I called Bob Van Order, a professor of real estate and finance at George Washington University.
Bob Van Order: Owning a house free and clear and owning a house and 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, he said, 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.
Van Order: So it depends on what your alternatives are, but for a lot of people it makes sense to pay down your mortgage if you can.
Meanwhile, Mike and Kate are asking themselves these questions all over again. They want to buy some property to build a house for their retirement. And they'll need to take out another mortgage to do so.
In Chicago, I'm Jennifer Guerra for Marketplace Money.