[quote=CA renter]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.[/quote]
With my scenario, after 7.3 years, you have no cash to pay for food. How are you going to eat?
If we’re talking about great depression, that house probably will see >50% decline. If you really must have a house free and clear, the $700k house can be bought for cash for <$350k. If you add in $140k from the original down payment, you'd own the same house for $490k vs $700k. Point is, you have the flexibility to do so.
While the investor will be out of cash at 10.8 years, the owner of the free and clear house will be hungry for 3.5 years since they ran out of cash to eat 3.5 years ago.
Now, if you're 50 and this happen, do you think someone who's in the 60s will be hired back into the work force who haven't worked for over 10 years?
Also, we've only talked about a depression scenario. What if we see an inflationary scenario like we saw in 70s-80s? Houses tripped, income increased drastically in nominal term (while not enough to keep up with inflation). However, in inflationary scenario, it would make a lot more sense to pay back $700k with money in the future that's worth less than 1/2 of what it was.
Lets look at what would happen if we see a repeat of 70s/80s where you can get CD rate around 15%. If you have $1M, your yearly interest would be $150k. If you paid off your house, your yearly interest would be $66k. After just 5 years, if you must have a paid off house, you can have it completely paid off in 5 years and still have $1M in your nest egg. While with the other scenario, you only have about $770k. So you're already $230k less well off. Going forward, you'll be perpetually in catch up mode compare to if you didn't pay off the house. Lets assume this inflationary scenario happen when you're still working. Your salary would drastically increase while your debt payment stay static in nominal term.
So, if we see inflation, you lose if you pay off early. If we have a great depression, you still worse off. I fail to see under which scenario would it be better to pay off the house. We're talking about strictly number here and not the intangible factor of peace of mind.
