REAL ESTATE
Is It Free and Clear?
As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), and several previous blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance, and the situation appears to be only getting worse, with an increasing number of defaults and loans coming due.
Most home owners, especially first-time buyers, are not in a financial position to purchase a property fully in cash, and usually require a mortgage to spread out payments anywhere from 15 to 30 years. When successful property owners finally do make that last loan payment, they are considered to then own that asset “Free and Clear.” Let us review what that really means…
“Free and Clear” technically means that the property is “free” of any loans, and “clear” of any liens or other financial claims. The Title is a document that confirms ownership, including any financial obligations, that is recorded with the tax clerk.
“Clear” benefits of a fully satisfied mortgage include the elimination of any monthly payments on the loan, no further interest payments, peace of mind, the right to sell the property without any lender involvement (on the seller’s side), the highly reduced risk of any “foreclosure” of the property, and the added ability to obtain equity loans. The latter, however, cancels the “clear” status if one is granted another loan attached to the property.
“Free” is a little tricker, however, as that can change in a snap. Despite the payoff of the mortgage, owners are not free from property taxes (in most states), claims to the property by the tax collector for failure of payment, contractor liens for unpaid work orders, judgments, easements, and in some cases (like condos), HOA maintenance fees. All of these “claims” can still result in the loss of property and/or a block of a sale. Insurance, as well as normal maintenance and repairs, are also not “free.”
Another factor to consider when “paying off” a mortgage, is the owner is no longer allowed to use interest payments as tax deductions. That, and other tax implications, may sway an individual from totally erasing the mortgage balance, depending on their personal situation.
Obviously, there are many positives to paying off a mortgage that one worked hard for over a long period of time. Though it likely “frees” up money to distribute to other wants and needs, the property is not exactly “free.” We still recommend consulting with a financial advisor, and possibly a real estate professional, when making such an important decision.
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
