However, for most people who are not there yet or will never be there, having a paid off house pose a significant risk. Lets take an upper middle class area today and your house is worth $700k and you owe $560k on it. Lets also say you have $1M in the bank, so you have an option of paying off the home or not. Lets take CAR scenario of great depression for example. How long can you live off $440k if you don’t have a job but also have a free and clear home. Assuming your yearly expense is around $60k w/out housing. You’re talking about 7.3 years before you’re out of cash. Depression also mean your house value went to the $hitter so no refi to take money out. Now, lets take a look at what would happen if you didn’t pay off the house today and have $1M in the bank. Your yearly expense would be $60k + $32.4k (housing) = $92.4k. Your $1M will keep you alive and housed for 10.8 years. That’s assuming you make 0% on your $1M or $440k. Either way you have a much better chance of riding through the storm with $1M in the bank and a $560k mortgage than a paid off house + $440k in the bank. If it takes 8-10 years to get out of a great depression, you’d be in deep $hit if you paid off your house (you’d either have to sell your house or drastically change your living standard). If you didn’t pay off your house, you’d have 10.8 years of buffer money.
So, it really depends on where you are in term of retirement savings. A paid off house is not risk free. If anything, I see that as a much bigger risk than having a mortgage.[/quote]
But in your scenario, the person with the paid off house still has the house at the end of that 7.3 years, and will NEVER have to make mortgage/rent payments for as long as he lives in that paid-off house. As his employment prospects pick up going forward, more of his income can go toward investments at a time when prices will probably be exceedingly low as a result of a multi-year depression (which is what it would be if he were totally unemployed for 7+ years) — exactly when you want to be getting back into investing.
Additionally, if the house were a nicer house, it could be rented out and the owner could easily downsize into a tiny apartment in a flyover state, giving him extra income for however long it takes to find employment and move back to his home area.
At the end of the 10.8 years with the “investor,” he is totally broke, has no home, and will be saddled with housing payments for at least 30 years (in most cases), preventing him from having that extra money for investments when it’s most valuable.
