Mortgages & Home Loans Real Estate Resources What "Free and Clear" Means in Real Estate By Elizabeth Weintraub Elizabeth Weintraub Facebook Twitter Elizabeth Weintraub is a nationally recognized expert in real estate, titles, and escrow. She is a licensed Realtor and broker with more than 40 years of experience in titles and escrow. Her expertise has appeared in the New York Times, Washington Post, CBS Evening News, and HGTV's House Hunters. learn about our editorial policies Updated on March 23, 2022 Reviewed by Doretha Clemon Reviewed by Doretha Clemon Doretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder. learn about our financial review board Fact checked by Katie Turner Fact checked by Katie Turner Katie Turner is an editor, fact checker, and proofreader. Katie gained experience at McKinsey by fact-checking content about business, finance, and economic trends. At Dotdash, she began as a fact checker for Investopedia, eventually joining both Investopedia and The Balance as a fact checker, ensuring the accuracy of information across a variety of financial topics. learn about our editorial policies In This Article View All In This Article How Free and Clear Can Let Seller Finance Leverage vs. Paying Cash for a Home The Benefits of Free and Clear Buying a Vacation Home Free and Clear Photo: Hero Images / Getty Images You will often hear real estate agents and investors talk about "free and clear" real estate, but being free and clear is also an aspiration of many homeowners. The phrase means there are no encumbrances secured to the property, such as a lien or mortgage. Key Takeaways Most home sales today require a former mortgage to be fully paid off before the new buyer takes on a new loan.Paying cash for a home is one way to buy free and clear, but the tradeoff is that you lose the ability to use leverage.Owning a home free and clear can offer a sense of security, but there will still be costs like maintenance, taxes, and insurance. How Free and Clear Can Let Seller Finance If you have a 30-year fixed-rate mortgage and make the same monthly payment every month for 30 years, at the end of 30 years, you will own your home free and clear. If you were to sell the home and wanted to make owner financing available for a new buyer, you would have no underlying lenders who could prevent that choice. Free and clear is the easiest way to provide owner financing when selling if a buyer cannot or does not want to obtain a loan. The problem with most owner-financed transactions is usually that the property already has at least one loan. Almost every existing mortgage today contains an alienation clause that calls for acceleration of the loan in the event the property is sold. This clause is often referred to as a "due on sale" clause. In the 1970s and early 1980s, many mortgages did not contain verbiage that prevented a subject to transaction (not to be confused with a loan assumption). This meant sellers could offer owner financing and let the buyer take over payments on an existing loan without either party getting into trouble or breaking any laws. Today, these types of transactions are rare. Lenders today demand to be paid off. Note Most lenders will exercise the option to call a loan due and payable if interest rates are rising. That's because they want their money back so they can lend it out again at a higher interest rate. Leverage vs. Paying Cash for a Home Another way to obtain a free and clear home is to pay cash for the home. Rather than pay a mortgage payment every month, some home buyers prefer to buy it outright by handing over a lump sum cash payment. It's a good investment to pay cash for a home, but it also prevents a buyer from buying a home and using leverage. Suppose you have $100,000 in cash and want to buy a home for $100,000. If you used leverage, you could put down $25,000 and buy four homes, using 80% loan-to-value mortgages. When you choose to go clear and free and buy one home for $100,000, you owe nothing but property taxes. The Benefits of Free and Clear Owning a home outright is a good feeling for many people. It is emotional security that the home belongs to the owner 100%, but it is not 100% protection. For example, it does not mean that a home cannot be seized under eminent domain by the government, and it does not mean that a home can't be wiped out by a hurricane or flood. You will also hear the term "clear" in reference to the title. Assuming there is no cloud on the title and that you received a title insurance policy when you bought the home, you most likely enjoy clear title to the home. However, if you pay a mortgage on that home, then the home itself is not free and clear. Although you may be free and clear from making mortgage payments, you still need to pay for such things as homeowner's insurance, property taxes, utilities, and general maintenance. Note Pay attention to the tax benefits of paying a mortgage. Until recently, the cap on interest deductions was $1 million, but homes purchased after December 15, 2017, are limited to an interest cap of $750,000 under the 2017 Tax Cuts and Jobs Act. Buying a Vacation Home Free and Clear A family made the decision to finance a vacation home in Hawaii. When property taxes escalated due to non-residency status, the increase affected monthly cash flow. A solution to the situation was to refinance the primary residence, which had a 15-year loan, paid down over 10 years with five years remaining. The family refinanced to a 30-year loan with the same monthly payment and used the proceeds to pay off the home in Hawaii, free and clear. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Consumer Financial Protection Bureau. "What Is 'Seller Financing'?" Carleton Sheets. "What You Need to Know About Subject-To Transactions." Internal Revenue Service. "Home Mortgage Interest Deduction," Page 10.