How Can A Person Be ‘Debt Free’ with a 300K Mortgage?

Can you you smell the rant coming by this post’s title? If so, good for you.

I have to get this off my chest because I keep seeing in all over the place on blogs and discussion forums. You get people paying off their consumer debts and go around calling themselves ‘debt free’ when they are not. How on earth can you be debt free when your paying $1000’s or $10,000’s in interest every year on your mortgage?

So when are you debt free? When you owe nothing to anyone. Or when you are not paying one dime in interest to anyone. The reality is most people won’t be completely debt until just before they retire if you own a home. Otherwise it is possible to do this earlier if you rent instead.

So how did this little perversion come about? Well I’ve got a theory and you can let me know if it sounds alright. Generally with high debt levels in North America and everyone keeps digging deeper (including their government) the concept of having no consumer debt feel like winning the lottery. So everyone who does pay off their consumer debt feels it is a major event (by the way it is a very good start) and then they get carried away and call themselves ‘debt free’.

Yet calling people that feels wrong when the still have a mortgage. I personally got consumer debt free about 19 months ago. It is a good feeling, but come on people. Let’s call a spade a spade and call this ‘I’m consumer debt free’. Being truly debt free is a much more major event if you own a home. Let’s not confuse our terms to just make yourself feel better.

This post is now part of the 142nd Carnival of Personal Finance.

23 thoughts on “How Can A Person Be ‘Debt Free’ with a 300K Mortgage?”

  1. Why not pull what the finance department of the government pulls and just call it ‘Net Debt Free’, unless of course you’re upside down on your mortgage this works.

  2. It’s just a goal – so you can call it anything you want. If calling the target “debt free” helps people get motivated to pay off their consumer debt, all power to them. The fact that they still have some debt isn’t really important.

    Anyhow, being truly ‘debt free’ isn’t a goal most rational investors would aspire to (unless they were extremely risk averse). I use leverage to improve overall returns slightly (the long-term total return of my investments is higher than the average interest cost), but mainly as a tax-management tool. Using tax deductible debt to effectively convert taxable income into long-term capital gains that are tax deferred, and, ultimately, taxed at a lower tax rate than income.

    I don’t envisage ever being “debt free” even when I’m retired. It just doesn’t make financial sense.

  3. Enough Wealth, that would put the “Net Debt Free” in your court as well. Having 100K in debt paying 5% costs 5 grand. . . if that 100K in debt purchased assets that are worth 100K and has income of $5500 then you are cash flow positive, and net debt free. That’s a great position to be in.

    If the finance department can set that as a goal (to be net debt free) then it makes sense that we can too.

  4. I’ve always wondered at the debt numbers posted in the media. The average household debt is usually around $80K. I assume this includes the mortgage (it’d be scary if it didn’t).

    I agree that debt free should include your mortgage, but I’ve always equated the term debt free with debt that doesn’t have a equal value collateral against it (consumer debt or student loans).

  5. But it is silly to say people can’t celebrate “debt free!” for paying of consumer debt if they have a mortgage, but they can if they are a renter.

    It is secured debt (unless you are upside down) and generally “good” debt.

    If you have a 300k mortgage and 300k in savings, then would you be able to say you are debt free? Paying off a mortgage early just doesn’t make a whole lot of financial sense.

    I understand what you are saying, they do have debt, but they don’t feel burdened by it.

  6. I agree. Most people will never be completely debt free. Admitting that is difficult, it’s much easier to deny the debt really exists or even that it is a burden.

  7. I so agree with you! I find it really odd myself. Debt is any money you owe anyone, so if you still have a mortgage you are not debt free. seems obvious to me.

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  9. Obviously you’re not debt free (in the true sense) if you’ve got a mortgage. You mention though, that it’s easy to be debt free sooner if you rent instead. That’s one way to look at it, but you’ve got to live somewhere so you’re always going to be paying rent, which could be considered a never ending debt (using the term very loosely). While you may not actually be debt free with a mortgage, at least at some point you’ll be rid of the mortgage/rent payment when the home is paid off.

  10. I agree with you, but am guilty of this myself (and probably will be in the future). It is a milestone to be consumer debt free. I’ll try and remember to make this distinction when we get there :))

    I should add, that when I saw my annual mortgage statement and realized I had paid $12k on interest, I nearly fainted. I could have used that $12k somewhere else! It is a financial burden, but one that often is ignored.

  11. Thank you! Thank you! This is a statement that bugs me all the time – I am debt free! Chances are good you aren’t, if you own a home. I never say I’m debt free even though I have only had one non-mortgage debt in my whole life for a car loan 10 years ago (long ago paid). That mortgage is “my credit card debt” and I will celebrate being debt-free the day it’s paid off – not sooner.

  12. FM,

    You have a point. When paying rent you have an inflation growing liability every month forever. It sucks, but depending where you live it might be a better option than buying a home.

    Everyone else,

    Thanks for the feedback!


  13. Its must be good and bad debt. I remember the feeling I had when my only debt was my mortgage and car lease. It felt very good.

    I’ve since killed off the mortgage and would call myself debt free now.. Yeah, I still have that car lease, but I could go pay it off if I wanted to, but I don’t think it makes sense.. There may be a penalty involved, the interest rate is low and I can tax deduct it somewhat.

  14. Here in the UK we call it Debt Free when you don’t have any consumer debts and Mortgage Free when you don’t have a loan on your house. So 2 different things entirely…I’m Debt Free after having been a Debt Free Wanabee for years and I am now working towards becoming Mortgage Free as well.

  15. If credit cards are the greatest source of bad debt, auto loans are a close second. You are upside down on the loan the second you drive off the dealership’s lot and it’s downhill from there. Too many people shrug off a car payment as a necessary evil.

  16. No matter how Humble,,If your accomadation and your vehicle are PAID OFF..They are 100% yours, It is surprising how little it takes to live..You will have abounce in your step and a ready smile on your face ,I know “cause i just paid off my Condo and my 2 year old car..Life has a new and beautiful meaning..

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