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The mortgage-free life
The Murphys at a Cubs game, one of the family's few "extravagant" purchases.
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The Murphys' smouldering mortgage papers.
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.
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Regarding the added amount as an investment, paying the mortgage off is a zero risk investment. All investments have risk, except paying the mortgage early. You are absolutely certain to avoid paying further interest, so the yield is whatever your mortgage rate is, which is usually much higher than low risk investments like money markets, savings accounts, or even (especially?) US Treasuries.
I think Emily is wrong.
Yes, it would be nice to make sure every child had music lessons. But as Mike says in an earlier post - their colleges accounts are funded.
I remember as a kid how excited my grandparents and cousins were when someone paid off the mortgage.
Once the house is paid off, the bulk of your monthly commitments are lifted. I think that peace of mind is worth the sacrifice.
Actually, I think a very subtle point was missed. Kate and Mike are a bit selfish. Kate mentioned that they never bought their kids a piano or paid for music lessons in order to obtain this goal; however, Mike had to have his cubs tickets and beer. What about the investment in their kid's future? There is no denying that children who play a musical instrument do better in school, and lead richer lives. I found it very selfish and self serving to be looking for vacation property at the expense of their children. Being a good parent also requires you to make sacrafices for their betterment, not yours.
Mr. Van Order can't do simple math. Not someone to use as an expert in my mind.
They were paying $1100 a month ($13, 200 a year) Now the last two years of your loan has the lowest amount of interest in it. Leaving that aside and pretending that half was interest, and that you are in the highest tax bracket (which they don't sound like) the interest deduction is worth $2,275 each year. $4,550 over two years.
On the other hand, in the two years they did not pay on the loan because it was paid off early they had $13,200 each year they did not have to pay out which they could use for other things than making the bank rich.
So how is it the same? $26,400 to invest vs $4,550 to invest while paying the bank?
Regarding Bonnie Reicher's point: The story wasn't quite as long as the ramifications would require (in my opinion). My wife and I paid off the loan after having refinanced twice (with both refi opportunities lowering our rate AND allowing us to take cash out to pay for college savings funds for our children). So while it is true that we paid off the original loan two years early, we actually paid off the loan two years early AND paid for two college educations (through the "College Illinois" program). We wrote the final check early because doing so made sense. We were below the "Itemization" threshold and we were liquid enough to write a check. As it turned out, doing so saved us a great deal of money (as opposed to keeping the money liquid). Every situation is different, but I would hope that the main message is that it is possible to put yourself on the road to being "mortgage free" while still young enough to enjoy the fruits of all of that labor. All it takes is the vision to create a plan, the will to stick to it, and some old-fashioned good fortune.
Love this story. We paid off our house when we were both 44 years old, in early 2002. We do live below our means and yes, we play more in taxes but I'd rather pay 30 cents to the IRS than a dollar to the bank. Now we have the money to travel and save for retirement, doing both.
Its just a little embarrassing admitting that we have no mortgage, my mother taught me never to brag.
Hope to pay off my second mortgage within two years, once my daughter graduates college-no student debt. Won't tell the wife this time because when I paid off the first after eight years, she immediately went out and found a bigger one to buy.
Frankly I wish I had never listened to all those experts who told me to sock away so much retirement money. I would have paid off the house sooner and had more money to invest in a cheaper market.
Always good to stay as much out of debt as possible.
I paid off two houses, on a moderate income. The key is establishing a budget. You need to know your financial expenses. Jeninfer's story should have more 'how to' details. The first payment on my house was $450; only $50 went on the principle, $400 went to the bank as interest. So, for every $50 you can pay in advance on the principle, it puts you 1 month ahead and it saves you $400. Track all your expenses for 4 months and you will easily find $50 a month that would be better spent paying down the principle. It is better to set aside money weekly saving up to buy a desired item. Rather than buy it making monthly payments with interest. The exceptions would be for a house or car. But, a couch, a washer, clothes; these things aren't immediate necessities.
One thing I do not understand about the story. Jennifer states that they could have used the money they deferred from taxes to invest. When you are paying down your mortgage, there are YEARS (perhaps a decade) in which it's better to take the standard deduction, because there is not enough interest to deduct! Also, yes, you can deduct the interest, but you still spent all of that money paying for it. I have never understood why this is such a good deal. To me, it would be better to NOT pay interest and NOT deduct than the reverse. --- I haven't been able to deduct for more than 5 years.
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