A Life Without Debt: The Debt Free House

The only debt we’ve ever incurred was to buy our house. At the time we bought, we just didn’t have a spare $150K lying around so we had to get a mortgage. We knew going in that we didn’t want to be stuck with it for thirty years so we set out to buy a house we could comfortably afford, knowing that we would be making extra payments on the mortgage. In other words we bought well below our means.

The first thing we did when we knew that we wanted a house was to save up for a large down payment. Twenty-percent was common in those days (no 10% or 0% loans, then) but we wanted to put down 40-50%, more if we could manage it. We were aggressive about saving that money and funneled every spare cent into our down payment account. It took us a few years of patient saving, but within about four years we had $60,000 saved and were still adding to it. We knew we were ready to start seriously looking for a house, so we went to the bank to talk mortgages.

I’ll never forget the day that the banker told us how much mortgage we could qualify for. When he popped up with $250,000, I nearly fell over. “Not if we want to eat, heat the house, and maintain the house,” I told him. $250,000 may not seem like a lot these days, but years ago when we bought our house and in the area we bought, $250,000 was a lot of money and would have bought a sizable place. We did the math and figured that for the length of time we wanted to hold the mortgage and the payments we would need to make to retire that debt in such a short period of time, we needed to buy something in the $150,000 range.

That was the biggest key for us: We ran all the numbers to determine not how much we could afford in payments each month, but how much we could afford in regular payments plus extra payments to retire the mortgage sooner. Had we figured just how much the plain monthly payment would be and bought only based on that number, we probably would have bought something closer to $225,000 and had a mortgage for thirty years. This is where a lot of people get trapped with big, never ending mortgages. They look only at the monthly payment and forget to look at how long they must pay that payment.

The next thing we did was look for a house that we knew we could stay in for a long time. We wanted something with a lot of land for extra structures and a floor plan suited for additions. By purchasing a house that could be upgraded over time, we knew we could stay in it for a long time, giving us plenty of time to build equity should we ever need to buy another home or so that when we sold at retirement we could clear a good profit. Had we bought a “starter home” we would have had to move before too long. Frequent moving never gives you a chance o build up the kind of equity that lets you buy your next home without a mortgage and, since the mortgages usually get bigger not smaller, you only add to the debt load. Our plan worked. Over the years we’ve been able to add on and build outlying structures so that we haven’t had to move to increase our space. (Also keeping clutter and “stuff” to a minimum greatly reduces our need for space, so our smallish home is still adequate.)

When it came time to buy, we negotiated well and ended up with a brand-new $150,000 home for $135,000 on over an acre of land with no HOA restrictions on how we could use that land or what additions we could put on the house. We put down just under $70,000 and mortgaged the remaining $65,000. The shortest loan the bank offered was fifteen years, so we took it but made sure there were no prepayment penalties. We paid it off in five years, thanks to aggressive saving and the fact that our regular payments were low enough to allow us to comfortably add extra every month.

We’ve lived here for sixteen years now and haven’t made a house payment in eleven years. In those eleven years we’ve simply saved our “house payments” and have amassed over $200,000 in savings (not counting the interest/dividends earned) just from doing that. I don’t see us going anywhere until retirement so we’ll continue to bank that money for many more years. If we do need to move, our savings and the equity in this house will allow us to buy something else with cash. People say, “Oh, you should have kept your mortgage because of the tax benefits.” True, there are tax benefits to a mortgage. But I know that in sixteen years those deductions would not have come anywhere close to the $200,000 we’ve saved by not paying a mortgage. Plus, we get the security of knowing that no one can kick us out of this house. No tax deduction can give you that.

And that’s how we live free of house debt. We planned well, saved aggressively, were patient, bought far less than we could “afford,” and have stayed put for many years, resisting the upgrade bug. We’ve never tapped our equity so it continues to grow for us, giving us a nice nest egg for retirement. It’s a great feeling. I think that anyone can do it, it just takes patience to save up a large down payment, the wisdom to buy a house that will serve you well for many years, and a willingness to buy beneath your means.

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19 Responses to A Life Without Debt: The Debt Free House

  1. Joan.of.the.Arch says:

    If your house is your retirement nest egg, does that mean you intend to sell it and move to a something of less value or to rent? How will you get the money out of your nest egg?

  2. Omar says:

    Congratulations! Thanks for the tips.

  3. I agree saving on interest rate is always greater than tax savings. Calculate yourself (there are free online tools). Not only that, you get peace of mind with paying off as a big bonus.

  4. Monkey Mama says:

    We are the same way – but for living in a much more expensive area. I don’t care if we have a mortgage 30 years. Our mortgage is a fraction of what it cost to rent here. It’s the only debt we ever had really, but made sense considering the alternatives.

    I look at those mortgage calculators some times and they blow my mind. I run them with my income alone and they blow my mind. I can’t imagine if I ran them with a 2-income scenario. It is definitely wise advice to not go with the most you can possibly afford. For most people, it makes little sense to stretch so much.

    I always say people “get” a mortgage for the tax benefits. You don’t “keep” a mortgage for the tax benefits (there probably wasn’t any tax benefits on a $65k mortgage anyway).

  5. Rob says:

    Congratulations this is what my fiance and I aspire for. Just one question, you said you plan to sell the house in retirement, what are your plans then? Downsizing?

  6. Chelle says:

    I think you did the smartest thing ever. So many people buy out of their means and see all kinds of problems that ensue from it. People don’t realize with a mortgage they are paying 4-5 times the price of the house over so many years.

  7. Eleanor says:

    Sadie, would you mind sharing with us some $$, such as approximate combined household income, your strategy for saving $60K in four years ($1250 a month!), and how you paid off $65K in five years?! ($1083 a month.) I have a feeling that these two accomplishments are not miracles, but are result of focus and a plan!

  8. Sadie says:

    @Rob: The great hope is to sell the house, buy a small motorhome and hit the road full time. Failing that, it’ll be a condo or similar b/c neither of us wants to do yard work into our senior years!

    @Eleanor: When we started saving our income was around 50K and it rose to around 70K by the time we bought the house. To save the downpayment money, we lived very frugally (hardly ate out, didn’t buy “stuff”, shopped sales, watched utility usage, drove clunky cars, etc.), banked every tax refund, rebate check, and all other “found” money out of the sofa cushions etc. We also rented a very cheap apartment, which left us a lot of income left over. We knew what we wanted (a house) and we made that our main goal. Yes, we had a plan and a focus.

    To pay off the loan so quickly, we just kept doing what we’d been doing. Our income rose to about 80K by the last year of payments, so that helped some, too. When we bought the house, we didn’t go all out furnishing it at first. We kept our ugly furniture and very slowly and gradually upgraded as money allowed. I’m still working on the house, as a matter of fact.

  9. Scott says:

    Mortgages aren’t always bad as they spread out your payments over time. And when trying to lower your cost of a purchase time is your friend (Net Present Value of money). The idea being that a dollar today is worth more than a dollar tomorrow (due to inflation and other measures).

    Also think of it this way, a mortgage is generally a fixed cost while your income tends to go up over time. In 30 years, your mortgage from today will seem like nothing relative to your current expenses.

    The idea of owning a home outright is great, but outside of paying early to avoid PMI or get rid of a second mortgage it generally is better from a cash flow perspective and time value of money perspective to not pay it early.

    So if you have a fixed rate of 5% and you assume long term inflation of 2%, it is really only costing you 3% per year to carry the debt. Can you find long term investments that can beat 3% interest? I think I can.

  10. No mortgage is certainly better than a tax write-off. You can find other ways to reduce taxes, I agree.

  11. Impressive. I like the systematic nature of your approach.

  12. minny says:

    Sadie, Sadie – wise words. We did the monthly payment most we could get route. Never paid anything off – we could never ‘afford’ it!

    Three years before the end we discovered thrift and within a year were saving so much money and deeply regretted the lost opportunities.

    Also, we noticed so little difference in our lives after thrift it was laughable.

    We managed to sell our house just before the crash hit the UK. We rented for a time and when we retired moved to a lovely place to live. We have enough money to buy our much smaller retirement home and some in the bank as a reserve.

    The freedom of no mortgage is a revalation – we could have done it ten years before we did. Still – at least we got there in the end!

  13. Others’ results may vary… :)

    A few observations about your scenario:

    1. You must have had a pretty substantial income to pay off a 65000 debt in 5 years, and amass 70k in savings in the similar # of years — and still live.

    2. You got a steal on real estate. In today’s market, unless you’re buying land next to a landfill or nuclear test site, you can’t get real estate for those $. We’ve been looking for a larger lot to build our dream home on (similar to what you describe), and can’t even get the dirt for under 100k.

    Most people who want to own a home (and still feed their family) will simply have to carry a mortgage most of their life.

    Few have the patience, discipline, or money to do what you’ve described.

  14. Gail says:

    Great going Sadie! I love your comments and view of life. You and your mate were wise and forward looking during a time in your life that most wouldn’t have been.

    As to you can’t find home or land for that kind of money. (9 years ago I bought a small home on a large lot for $60,000 in a nice town. 7 years later (right after the market crashed) we sold it for the same $60,000 and moved into the home my hubby built for us (worth much more than what we put into it–sweat equity). There are still plenty of places in the country where you can get real estate reasonably priced, but you can’t expect a mini McMansion for those kind of prices. My SIL and BIL bought a new home 8 years ago for around $250,000. It supposedly was the ONLY thing they could find. I’ve seen pictures of the home-it is huge, it is a McMansion and I’m sure if they had been WILLING to live in a lesser house they could have found one for much cheaper. It is the willingness to be frugal that separates those that have a paid off house and those that don’t. This same couple always cry proverty and then you hear about the 50th birthday party she threw her hubby, you know they either have plenty of cash or plenty of credit on their credit cards. That bash had to have run a good $5000!

  15. minny says:

    Sorry whiteeyebrows I disagree with your statement that you need to earn a huge amount to save a lot. Over several years, by living frugally it is possible to save a lot of money.

    You don’t have to live in an expensive rental. You don’t have to have a car loan and expensive car. You don’t have to eat out. You don’t have to spend a lot of money on clothes and ‘things’. You don’t have to spend a lot on food.

    It does really depend on what you are prepared to do without to get the end result you want.

  16. I think the key is that you had the discipline to buy a house $100,000 BELOW what the bank said you could afford. Most people are far too materialistic to do that.

    All the people I know who have substantial debt live in a 3,000+ square foot house then cry and whine about the ‘economy’ causing their struggles.

    As for us…. we bought a rat-filled, paint-peeling shack in a nice neighborhood and have fixed it up ourselves….twice…. so our next house should be bought with cash completely debt-free. But in my case, it will be 1800′ or less…. WAY smaller than what any of my more stylish friends live in.

    To me debt free is worth more than a bunch of unnecessary square feet.

  17. ThiNg says:

    I love the people who buy huge 3500+ square foot houses then complain about cleaning them!

    We have a split level (in-law suite) and my parents live with us rent free. Our “half” of the house brings us to just over 1000 square feet. It takes me a whole day to clean the place (maybe I do it more thoroughly then the average joe!). But I couldn’t imagine cleaning a 3500 or 4000 square foot house every week!

    Give me small and give me comfy!! But best of all make it easy to maintain!

  18. We didn’t buy more house than WE could afford. We wisely ignored the RE agent and mortgage broker who said we could afford twice the house. NOT! I wonder how fleshless waifs who’ve had nothing to eat pay mortgages? We had to have money for food, clothes, gas to work, utilities, growing children, etc., etc., etc.

    Now, our modest home is paid for.

  19. Peter says:

    You did similar to what I am doing right now. Just bought a house with more down and 15 years fixed rate loan. I will be paying that off in next 2.5 years. Congratulations !

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