Is Owning Your House Outright a Bad Idea?

Posted by in Articles, Home Affordability | 86 comments

This guest post was written by Henry Truc from Go Banking Rates, a website that brings you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide. Follow them on Twitter at @GoBankingRates.

For most homeowners, paying down their mortgage loan is akin to fighting off the plague, but the dream of one day owning their home in full keeps them going. Unless you’re flush with cash, buying a house usually means taking on a sizable amount of mortgage debt, and with that, forking over a fortune in interest payments.

Conventional wisdom suggests that owning your home outright is the smarter financial strategy. You don’t owe lenders anything, you save money on interest payments and you’re one major step closer to financial independence.

That said, there are some disadvantages to owning 100 percent of your home equity that should be considered.

Disadvantages of Owning Your Home in Full

Though it’s debatable whether or not there is such a thing as good debt, paying off your mortgage in full does reduce certain opportunities for better use of your money. Home loan debt isn’t necessarily a bad thing and here are a few reasons why:

  • Tax Deductions: One of the most popular reasons for maintaining mortgage debt is the tax advantages that you enjoy on interest payments. It doesn’t necessarily make sense on its own because owing money just to save money on interest defeats any economic purpose. It does, however, effectively reduce the cost of that debt.
  • Greater Financial Flexibility: Instead of having no cash in the bank and a mortgage paid in full, it may be a good idea to tap into that equity just to ensure that you have some access to cash if an emergency arises. If you pour every dollar into paying down your mortgage and don’t have anything left over for home repairs or one-off incidents, you could be positioning yourself in a tough spot to handle any costs of unforeseen events.
  • Cheaper Debt: If you can get a good mortgage rate, chances are it’s multiple times less than your credit card, personal loan or auto loan interest rate. Consolidating your debts with a HELOC or home loan refinance can provide you some debt relief and help you save money on interest payments. Plus, mortgage interest payments are tax deductible, unlike credit cards or other personal loans.
  • Property Value: Since your property value isn’t affected by your mortgage balance, you can put your equity to better use than just having it sit around idly by, waiting for you to sell your house. You may want to consider taking out a loan against your home for value-added investments like remodeling your home or adding another bedroom that will increase its market value.
  • Return On Investments: By the same token, you can probably do better with your home equity than having it sit around earning a zero percent return. Depending on your risk tolerance and the potential return on investment, you may be able to outpace a low fixed mortgage rate. Granted, no investment is guaranteed and you’d be hard pressed to find a CD rate that trumps your mortgage rate. So for practical purposes, putting your home equity at risk to pursue any investment may not be a shrewd idea.

Keep in mind that these options should only be considered if you own a majority of your home equity or own your property outright. Mortgage debt is still debt. Whether you owe a balance on your first mortgage, are refinancing to consolidate other debt with higher interest rates or using it to fund a home improvement project, you’re still taking out debt on your home. Before agreeing to any home loan, use a mortgage calculator to ensure that you can afford the monthly payments first.

Advantages of Home Equity

Owning your home, whether outright or just a majority of the equity, has undeniable advantages. The more equity you own in your home, the more stable your financial situation may be. The peace of mind and stability of not having to worry about meeting mortgage payments is hard to put a price on.

You shouldn’t consider taking on more mortgage debt against a home you have little or no equity in. In addition, if you are fortunate enough to be in a financial situation where you can own your home outright, be debt free and have a surplus of savings to invest wisely, you may not need to access your home equity at all. The key, as always, is to find the right balance that fits your financial strategy and maximizes the efficiency of your money.

CapWest Mortgage Rates

Do you think it’s better to own your home outright or to owe a small mortgage balance?


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86 Comments

Join the conversation and post a comment.

  1. Will

    BCL1.. the dumbest financial decision of your life was *not* paying off your home 100%, it was buying a house in an inflated market.

    You made a great decision to pay off your home, but a bad one to buy one when you did. Since it seems 99% of everyone is stupid.. Wait for interest rates to be ridiculous before you *buy* a home outright.

    -Everyone else waits until interest rates are low to buy, and supply and demand dictates that house values will be inflated then.

    For anyone else out there who needed to read this far.. Don’t buy a house *until you need the space*.. When will that be? Probably when you need 3-4 bedrooms to house your family.. Sell it as soon as you only need 2 bedrooms..you can easily find a nice apartment in most markets with 1-2 bedrooms. The only way you get ahead on a house vs. an apartment is if you own the house in full and bought it when values were *low*.

    You’ll save money on maintenance in an apartment, you’ll save money on electricity, and you’ll have the freedom to *move* if the neighborhood goes down.. Try to sell a house after you’ve been the victim of a break-in… You’ll get the point then. You want to move, and you can’t find anyone who wants to buy your place, possibly for years. If the same thing happens in an apartment, the worst case is you lose a few thousand breaking your lease immediately or you have to wait a few months to end it the right way.

  2. Nancy

    Big believer in zero debt for myself, but I’m glad there are a bunch of suckers out there to keep the American economy going by living above their means; Spending all their money as well as money they haven’t earned yet. My sister, who is not the best money manager, received a windfall and paid off her mortgage and invested the rest in the stock market (I advised her not to put all her eggs in that basket but she was enthralled with the dividends, not understanding, what goes up, must come down.) I am so happy she used some of that money to pay off her house because at least she has something to show for that money now.

  3. Nancy

    You must look at real estate as a long term investment. Looking at it any other way will give you anxiety attacks because the housing market always goes up and down. What wasn’t normal in the current housing crisis was banks giving out loans to unqualified people. This increased demand causing housing prices to artificially increase in value very quickly. Those people are out of the game now and the rest of us are stuck with houses whose value has decreased. But, with immigration and births, our population will continue to grow and with an increase in population you have an increase in demand, it’s just a little slower growth. Of all the things you could have invested your money in, your house was the best investment, if you can hang on to it till the value goes up again.

  4. Dan

    Agree with all, owning a home is so much better than an apartment. I pay less for my mortgage and utilities right now than any apartments in my area of the same size, except that I have lake access and a 1.7 acre lot thats between a canal and a dirt road:)

    So I save money, the kids can go out into MY yard and play, and I’m earning equity..

    not to mention the second bedroom I added, and the number of improvements I’ve made that raise the value of the house, I only plan on owning the house for a total of three years, and I should make an extra 75k profit after selling it. Wouldnt it be nice to make an extra 25k a year?

    ALSO I got the $8,000 tax credit from Mr. Obama.

    mmm.. taxes AND money seems to be on the OWNING a house side.

  5. AZguy

    I LOVe having my house paid off.

    No worries about payments, no worries about the rent being raised, no worries about the landlord selling the house and I have to move,and I can use all that money I used to pay on principal and interest for other things, split between building capital, and having some fun in life.

    I bought less house than I could afford, but enough to fill my needs,and paid it down as much as I could, so it was paid for in about 6 years. 6 years of sacrifice for decades of rewards.

    To paraphrase a scene from Animal House:, “Son, being drunk, stupid and in debt is no way to go through life”

  6. Dave

    @Brad
    Brad, you could not be more correct. I read your comment and thought, “Brad just ended that discussion because he’s absolutely right!”

  7. Tom

    Man, what banker/broker/insurance salesman wrote this. They should be in jail for false, predatory or dare I say stupid advertising.

    Unless there is a viable financial advantage debt is wrong, wrong, wrong. Co-ownership is never friendly.

    Owe ye no man mney.

  8. Tom

    Man, what banker/broker/insurance/snake-oil salesman wrote this. They should be in jail for false, predatory or dare I say stupid advertising.

    Unless there is a viable financial advantage, debt is wrong, wrong, wrong. Co-ownership is never friendly.

    Owe ye no man money.

  9. ScottySemperFiVet

    NOT… That is the stupidest advice! By owning my home now I freed up $1200 a month to add to my rainy day fund which I could not do before because I was paying an investors rainy day fund. Society has been brainwashed to believe debt is good. Debt is okay in moderation but only that. My parents and grandparents had no debt their entire lives because they learned the hard lessons of the great depression of the 1930s. Cash only don’t buy what you cannot afford until you can afford it. I am much more financially sound. I will not deny that it was not easy but now the Deed is mine yippee…

  10. Boris

    The only redeeming value to this article are most of the comments. People dream about paying off their home, not having more mortgage debt. Nice to see some post-artice common sense.

  11. KLS

    There is no way being in debt is sound financial practice. I paid our house off 3 years ago, put the $25,000 I was paying per year to the bank aside and paid cash for a rental house. Now I have $900 a month extra income, 2 houses paid for, no mortgage payments, and am working towards buying another rental.

  12. Banton

    Going into debt for home ownership is not an investment.

    Your home should never have been thought of as a investment. its a place to sleep, eat, entertain, raise a family…
    Getting a loan for purchasing a home in not an investment- its GAMBLING.
    How many real estate bubbles bursting do you have to witness over the decades before you realize that this is a game you should not play.

    If i follow the logic that bankers and realtors tell me, I will own three homes in my lifetime with an average stay of 7 years. Assuming I buy the same price house each time (with a 30 year 5% mortgage), in 44 years, I will have paid $202k interest in the thieves game called amortization.

    I will also have paid $44K in property taxes and $20K in Realtor fees.
    So my true 44 Year investment = $416K paid for a house worth $150K.

    But not to worry. bankers, realtors, and the ignorant say my home value will increase 8% a year…forever!!!
    With all that compounding interest, my $150K “investment” will be worth 1.5 Million in thirty years!! where could I possibly go wrong with that!!

    The truth is that, in my twilight years, my $150K will NEVER appreciate to the $416K I have paid for home ownership.

    Housing only appreciates because of the availability of loans to pay the inflated prices -not supply and demand. housing prices would crash if mortgages were outlawed.

    Housing will always ride on top of a bubble that requires it to burst periodically, in order to lower the values enough for people to qualify for a loan and start the bubble growing over again.

    So buy an expensive home, pay it off quickly, and never go into debt again.

  13. Red Pill Post

    This guy is an A$$ Clown. “Buy Silver Crash JP Morgan” is a better place to save your money. The whole system is about to crash. Good luck people and check out the web page.

  14. KippMS

    Unfortunately one never “owns” their home. I can pay off the mortgage till the cos come home, but if for some reason I can’t pay the property taxes? What happens? All of my paid off “equity” is confiscated by the municipality in which I live. So for all intents and purposes one is always paying “rent” on the property your now paid off house sits on. Everything else one purchases one owns including a car once it is paid off. Not so your house. So much for paying off the mortgage.

  15. Andrew

    Is the author retarded or just born stupid?? What an idiotic trash article.

  16. Br'er Shaygetz

    Can only echo what has already been pointed out…namely…what utter, mind numbing bovine effluvium.

  17. Mrs. Accountability

    One of my coworkers always tells me that I should never get rid of my mortgage fully but I always have to remind her that my payments are so low that I can’t use the interest for tax deductions. Good article, it points out that paying one’s home in full is a good idea but when you just can’t, as in the example Little House pointed out when a mortgage is just terribly high, at least you can use some of the options mentioned.
    .-= Mrs. Accountability´s last blog ..I Love Amazon Prime and Thanks for Shopping Through My Amazon Link =-.

    • Little House

      @Mrs. Accountability – Thanks for pointing out that there are times when it’s best to pay off a mortgage quickly vs. times when it may be better to invest money in something else. It really depends on the total amount of the loan, the interest, and if a person is planning to sell the home before paying it off in full.

  18. M

    You are always going to need a place to live, yes?
    And rent will always go up (not to mention other things being out of your control, such as your landlord getting foreclosed upon), while your mortgage has an end.
    Property taxes will most likely be way less than what you would pay for a similar property in rent.
    I don’t see the downside in owning an asset that historically has appreciated, since you must pay to live somewhere anyway.
    .-= M´s last blog ..Saved Quarter Challenge =-.

  19. William H

    I only have 8 years left on my mortgage and I’m looking forward to pay it all off since I’ll free up over $20,000 a year. More then enough to put away in a IRA, Roth IRA, and/or Savings Account. It’s money that won’t be locked up and I’ll have access to it when I need it.

  20. Ronald R. Dodge, Jr.

    Now my shot at the reasons given above:

    1) Tax deduction

    What tax deduction? As I knew going into the deal, I wasn’t going to have enough for the Schedule A to use the itemized deduction over the standard deduction. Hecks, the interest rate is only 4.99% stated APR. As such, this argument doesn’t apply.

    2) Financial Flexibility via Emergency Fund

    This does make some financial sense as having no money at all for those rainy days makes no financial sense. If you are in dire financial straits, then you may be forced to go with a very small Emergency Fund. But then you wouldn’t be worrying about paying down a mortgage either as chances are, you would have other debt with much higher after tax basis effective annual percentage rates than what your mortgage would be. On the flip side, if you are within close range of paying off the mortgage, you may want to go ahead and do that knowing your emergency fund is going to be temporarily low, but then use the extra cash to build that emergency fund right back up.

    3) Cheap Mortgage Rate

    This is a depend type deal, but chances are, I would only have the mortgage if I was having to deal with other high rate debt that needed to be gotten rid of. On the other hand, because of how banks tends to be with requiring escrow accounts which earns absolutely nothing for the borrower, I would be much apt to avoid the mortgage route.

    4) Property Value

    The ups and downs of property value is primarily a function of inflation. As for adding onto the home, I would only do that if it made financial sense for other reasons.

    5) Return On Investment

    As said earlier, I would not be likely to do this, at least not with my primary residence home. That particular home is considered to be a safe haven and as such, there should be no economic risks other than what can’t really be avoided on such safe haven type deals. If I had other property, that may be more likely to do, but then again, it would still have to be greatly monitored.

  21. michele

    I purchased a home for myself and children at less than half of market value for cash with an inherited IRA. Yes, I paid big taxes to cash it out, but not nearly as much as I would have in mortgage interest. Now, as a proud homeowner of a nice home, I can say, it is a beautiful thing to be debt free. If at all possible, pay your house off. That’s your biggest debt.

  22. John

    Absolute crap peddled by bankers. They make their money by keeping you indentured to their debts for life.

  23. Thomas

    There’s a youtube video called Banking – the Greatest Scam on Earth. Anyone thinking there’s a supply and demand to inflation is kidding themselves, the banks control the supply, and thus control the price.

    Equity = mortgage = debt = hard labor.

    You should only do this if you’re really desperate, or really crazy and want to screw the banks over posthumously, and then you should take out a double mortgage and kill yourself, after burning the money. Take out numerous payday loans too, and burn them as well.

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