3 MIN READ
Published July 15, 2024
In the landscape of American homeownership, there's uplifting news - an increasing number of homeowners now possess their homes outright. According to a November analysis of U.S. Census Bureau data by Bloomberg, the percentage of Americans who own their homes free and clear has risen by 5 percentage points over the past decade, reaching nearly 40% in 2022.
Notably, more than half of these mortgage-free homeowners are of retirement age. For those heading into retirement without a mortgage, the financial benefits are significant.
Owning a home outright means 100% equity ownership. If property values in your area have increased since your purchase, your home has transformed from a mere residence into a substantial financial asset.
Financial Advantages of a Paid-Off Home
Owning a home free and clear does not provide returns in the same way as traditional investments. However, the journey to a mortgage-free home typically involves years of payments, with a significant portion going towards interest. For example, a $500,000 home with a $100,000 down payment and a 15-year mortgage at 2.5% interest could result in approximately $80,000 paid in interest over the loan term, excluding property taxes, repairs, and insurance.
Despite these costs, the nationwide housing market has generally been favorable. Data from the Federal Housing Finance Agency indicates that home prices in the U.S. more than doubled between December 2008 and December 2023. Thus, a $500,000 home purchased in 2008 might be valued at around $1.08 million today.
Impact on Retirement Budget
A fully paid-off home can significantly affect your retirement budget. Eliminating a $2,500 monthly mortgage payment reduces annual expenses by $30,000. According to Fidelity, retirees typically need 55% to 80% of their pre-retirement income to maintain their lifestyle. Owning your home outright can lower your required retirement income, possibly to the lower end of this range.
If you pay off your home by age 60 and retire at 65, you could invest the $2,500 monthly savings over five years. Assuming a 7% return, this could grow to approximately $160,500, providing a substantial financial cushion.
Benefits of Downsizing
Another option is downsizing. Selling a paid-off home worth $1 million and purchasing a $400,000 townhome could net you $600,000. Additionally, downsizing reduces maintenance and property taxes, further easing financial burdens.
The financial benefits of owning a home outright extend beyond equity and retirement savings. Downsizing can free up significant funds, allowing you to pay off other debts and invest in your future.