are you considered debt free if you have a mortgage

Are You Considered Debt Free if You Have a Mortgage?

For many people, the goal of becoming debt-free represents true financial freedom. But an interesting question arises around homeownership – can you really consider yourself debt-free if you have a mortgage?

At first glance, the answer seems obvious. A mortgage is technically a form of debt, so owing money on your home would automatically disqualify you from being debt-free, right? Well, it turns out there’s more nuance to the issue than you might think. Let’s take a closer look at what it really means to be debt-free as a homeowner.

Defining Debt

To start, let’s clarify what we mean by “debt.” In simple terms, debt refers to money that is owed to someone else. This includes any loans, credit cards, or unpaid bills that you are responsible for paying back over time. Mortgages, auto loans, student loans, and credit card balances would all be considered forms of debt under this definition.

So by that logic, having a mortgage does mean you are in debt and therefore not 100% debt-free. But compared to other types of debt, mortgages occupy a somewhat unique position.

The “Good Debt” Argument

There’s an argument to be made that certain kinds of debt can actually be beneficial if used strategically This is sometimes referred to as “good debt.” The idea is that borrowing money to acquire assets that build long-term wealth – like real estate or higher education – can be smart financial moves, even though they involve taking on debt.

Proponents of this view say that reasonable mortgage debt used to finance a primary residence can actually aid in wealth building. As you pay down your mortgage, you accumulate equity in your home that you can eventually tap into. And your property may appreciate in value over the years. For these reasons, some don’t consider a mortgage the same kind of toxic debt as high-interest credit cards or payday loans.

But not everyone buys into the notion of “good debt.” Critics argue that all debt equally adds risk and reduces flexibility. Even if mortgages come with lower interest rates, they say, you are still on the hook for monthly payments and subject to potential foreclosure if you default. So in a strict sense, having a mortgage means you aren’t totally debt-free.

Weighing the Tradeoffs

At the end of the day, the decision comes down to your personal financial situation and what debt-free living means to you. Here are some key factors to consider:

• Your overall debt load – A small, manageable mortgage may have less impact than high levels of credit card, auto, and student loan debt.

• Ability to pay off mortgage – Can you realistically pay off your home loan within a reasonable timeframe? The longer you carry debt, the more interest you pay.

• Opportunity cost – How might mortgage payments affect your ability to save for retirement, college, or other goals? Debt impacts your cash flow.

• Financial flexibility – Being tied to monthly mortgage payments reduces wiggle room in your budget should emergencies arise.

• Personal values – Some people feel strongly about living completely debt-free for psychological reasons.

There are good arguments on both sides of this issue. A mortgage provides major tax incentives and forced savings via equity, but it also represents ongoing debt payments. You’ll need to weigh these pros and cons relative to your own financial aspirations.

The Middle Ground Approach

For most people, the realistic solution lies somewhere in the middle. Being 100% debt-free may not be feasible if you want to own a home prior to retirement. But that doesn’t mean you have to take on endless debt either.

Here is a balanced approach that allows you to become mostly debt-free while still reaping the benefits of homeownership:

• Save up a substantial down payment of 20% or more before purchasing a home. This avoids burdensome private mortgage insurance.

• Opt for a 15-year mortgage term rather than 30 years. This cuts interest costs and pays off the loan faster.

• Make extra mortgage payments each month to accelerate payoff. Even an extra $100 per month makes a difference over time.

• Build up a solid emergency fund. This provides a cushion if mortgage payments ever become temporarily unaffordable.

• Once your mortgage is paid off, remain debt-free by saving up to pay cash for future cars, education, etc.

This middle path enables you to become debt-free relatively quickly while still using a mortgage strategically to purchase your primary residence. Once the mortgage is paid off, you can live completely debt-free by paying cash for big purchases.

The Debt-Free Homeowner Mindset

Regardless of which approach you take, developing a debt-free homeowner mindset is key. That means making payments on time every month, avoiding risky home equity loans or lines of credit, and staying focused on paying off your mortgage early.

Owning a home is about more than just having a place to live. When done responsibly, homeownership can serve as a forced savings plan, provide greater housing stability, and allow you to build equity that can be tapped later in life. But these benefits are greatly reduced if you fall into the trap of excessive mortgage debt.

So while opinions vary on whether having a mortgage means you’re debt-free, what matters most is living within your means. With prudent financial habits, homeowners can achieve a life mostly free of debt, even if they have a small mortgage. And once you’ve paid off your home loan, you’ll be ready to begin the next phase of your financial journey completely debt-free.