What is Free-and-Clear?

Free-and-clear refers to a property that is owned outright without any mortgages or liens against it.

A Longer Definition: Free-and-Clear

Owning a property free-and-clear means that a homeowner has full ownership of their property without any outstanding debts, mortgages, legal claims, or liens against it.

For a first-time home buyer who uses mortgage financing to buy their first home, the property cannot be free-and-clear until its mortgage is paid in full and the lender releases its lien from the home.

According to the National Association of REALTORS®, 94 percent of first-time home buyers use mortgage financing.

Homes with tax liens and mechanic’s liens are also not free-and-clear because a third party has legal claims on the property.

Owning a property free-and-clear gives financial and legal freedom.

Homeowners who own their home free-and-clear can sell their home, refinance it, make repairs, and lawfully use their property how they desire.

Free-and-Clear: A Real World Example

Imagine a homeowner who inherits a home from their parents. The inherited home has no mortgage or liens attached, which means it was owned free-and-clear before it was bequeathed.

Meanwhile, the homeowner is starting their own business and needs access to capital.

Instead of taking a high-risk bank loan for a new business, they open a low-risk home equity line of credit on the inherited home, using it as collateral for a mortgage. The bank approves their mortgage, attracted by the low risk associated with a free-and-clear property.

Common Questions About Free-and-Clear

What are the benefits of owning a property free-and-clear?

Owning a property free-and-clear provides several benefits, including financial freedom from mortgage payments, reduced risk of foreclosure, potential savings on interest payments over time, and increased flexibility in using the property as financial leverage.

Can I use a free-and-clear property as collateral for loans?

Yes, a free-and-clear property can be used as collateral for loans, such as home equity loans or lines of credit. Lenders often view free-and-clear properties favorably because they are lower risk.

Does owning a property free-and-clear mean no expenses?

Owning a property free-and-clear eliminates mortgage payments but it does not exempt the owner from other expenses like real estate taxes, homeowners insurance, and maintenance costs. However, these expenses are typically less than mortgage payments.

Do I have to have homeowners insurance if my home is free-and-clear?

Mortgage lenders require homeowners to maintain adequate homeowners insurance coverage. When the mortgage is paid off, that requirement no longer applies. However, it’s recommended that homeowners keep their homes insured against perils and protected against loss.