Of course your home is considered an asset in many discussions, I just think it's one to ignore in the context of wealth building. I'm suggesting that we can paint many scenarios where on paper it seems to make sense to pay mortgage interest while investing cash flow elsewhere. These strategies are generally made by those who either have a bias towards investing in securities or (mostly) those who SELL them.

Of course if you own your home free and clear, you have no variation in the amount due each month (excluding taxes & maintenance), it's ZERO. Thus begins the conversation about how we might do better with that capital:

If I can earn x % in say porcelain dolls over x years, with inflation at x %, and with my earning power increasing at a x % (exponential) rate I'll have one ZILLION dollars at age x.

A nice exercise but I think most folks are best served with a more conservative approach. Most do exactly what you describe; ignore the risk.

Additionally – banks aren't individuals. Banks have employees – IT, secretaries, cashiers, many of whom aren't rich at all. Not all shareholders or bondholders are rich either as these include retirement funds of many middle class people.

I am sure some of the banks' shareholders give money to charities to help poor people. But if they had given all money to their borrowers for free especially with the default rates they have, they'd have to fire some of their employees. Then their employees would become poor.

Banks and Governments that you loan to (Bonds) are not poor…

Paying off your mortgage versus investing in other assets is a complex decision with numerous variables and a great number of unknowables. But people need to realize that if you alternatives are pay off mortgage vs stocks/junk bonds then you are comparing a low risk investment vs a high risk investment (so you better be very comfortable with the implications of that).

And for those who think time somehow cures the inherent volatility of the stock market, I suggest you consider the following: http://knowledge.wharton.upenn.edu/article.cfm?ar... The point is there are NO guarantees in the stock market (even over a thirty year period)

This excludes all modern banking as well as investing in bonds. When you put your money in a bank, you really lend your money to the bank. At low percent, yes, but it is still a loan. Now, the banks take this money, put a certain percentage – normally around 10% but in this times it's higher as a cushion towards future losses – and lend the rest at higher percentage. So by giving banks your money you enabling these higher rates.

If you invest in government bonds, you lend money to the government. If you invest in municipal bonds, you lend money to municipalities. If you invest in corporate bonds, you lend money to corporations. So if you think that you shouldn't be charging interest you shouldn't put your money in a bank or invest in bonds or bond funds. Of course then businesses will not be able to borrow money.

How many people will lose their jobs without lending? I guess we see this now.

As to usury, do a little elementary math. At this moment the default rate on credit cards is around 10%. This is unsecured debt, so there is no recovery in default unlike with mortgages. Now, let's say you give your own hard earned $1000 to 10 people for a year, $100 to each. Let's say 1 person defaults i.e. you lose $100. What interest rate do you need to charge other 9 just to break even i.e. to get your $100 back? Hint: you need to get $100 in interest on $900. Unless are you just prepared to lose money, but then this will be charity.
Yes, the interest is considerably below your rate. But this 10% is average and it includes both low risk and high risk borrowers. So for higher risk borrowers, the risk of default is higher. Being late or defaulting on another bill corresponds to higher risk. In a riskier group more people default. Let's say 2 out of 10 in a group will default. I.e. you lose $200 out of a $1000. What rate do you need to charge on $800 you gave to other 8 people to get $200 in interest? Close to the one you are paying, right? I'll leave the calculations to you as an exercise.

Keep in mind that this little exercise implies that you got your $1000 for free and you lend all of it. But in case of banks, you have to consider a) the interest paid on deposits b) money left in reserve i.e. you can only lend $900 out of a $1000 in normal times, more now, but you still have to pay interest to your depositors on the full amount c) business operational expenses i.e. lease, furniture, salaries. And yes, banks are supposed to make profit. Oh I forgot, your verse said that they should all operate as charities. But then, what about all the people who work for banks, where will their salaries come from? What about shareholders? Further investment to expand and hire more people?

Back on topic. I think paying or not paying mortgage is a very personal decision. I paid off my mortgage and, yes, it feels great. After all had I not repaid with the money I got from the sale of the condo I was renting out, I would have invested at least some of the money in stocks and lost some of it. Not only that, back in 2000 when I had all these insane gains, a friend suggested that I sold stocks and pay off my mortgage. I told him I was earning higher rate on stocks… Then the market crashed, my gains evaporated, but I still had my mortgage. This was probably one of the reasons while I choose to pay off my mortgage when I got a second chance.

On a flip side, I now have a large chunk of my net worth in my home. At the same time if I were to decide to "upgrade" now, I'd probably take a mortgage even if I could pay cash for the difference. One reason is that rates are low and there is a great chance with the current government spending that at some point within next 10 years of so they will go significantly higher. I am still not convinced on inflation scenario near term as there are still some deflationary pressures out there, but there is a good chance of high inflation later on. If we do see high inflation and/or higher interest rate, a low fixed interest loan is an advantage. Think early 1980s – banks' paying over 13% on regular CDs, even short term CDs, while people who took mortgage in the 90s paying 9%.

There are other factors as well – your age, since you probably don't want to be paying mortgage in retirement; whether or not you can pay it off completely with one lamp sum or not – if not, maybe putting this money in a bank in case of a job loss or a really serious emergency would be more useful.

As to 401K vs mortgage, there are other considerations. First of all, stocks is not the only option in 401K. There is stable value, for example, or at least in our 401K government inflation-protected bonds. So if you are averse to risk, you can put your money there. If your company matches some percentage, this is often 50% return on your investment. Yes, you can lose it in stock funds, but who says you have to invest it all in stocks? Stacey made a good point about bankruptcy as well.

@ Jarrett, I can relate to the dreaded "can't deduct the interest on the student loan" situation. In one of our previous refinancings on our former house, we rolled DH student loan balance in and thus it became deductible interest. However, one case for NOT rolling your student debt into a mortgage/equity line: if you die, your heirs are not legally responsible as you were the only one to sign the loan paperwork. However, if you roll the loan balance into your mortgage…your spouse will be stuck paying for it in the event you die. Besides, what tax rate are you at? Sometimes you just have to suck it up and and have less write-off…

BTW: I would NOT take money from retirement…you'll obviously lose the magical compounding from a nice long time horizon of investing. Just do your best to pay it down as fast as you can.

I wish there was a quantifiable way to show how bad a ROR would be given all of the risks against your strategy: risk of not sticking to the savings plan, risk of job loss (and not able to find an equal paying replacement), risk of divorce / death of spouse, risk of large medical expenses, risk of markets not matching historical returns, tax consequences and the list goes on and on. Any of these things would easily force someone to sell equities at potentially the exact worse time to do so.
Even worse is that the odds of these things happening are increased in your 30-year window (it's nearly guaranteed), with the end result being: your plan will not look as rosy as you make it out to be — meaning you are showing the "Best Case" scenario for your side — where is the "Average Case" and the "Worst Case"?.

With a paid off mortgage, this risk window is reduced to 15-years, or even a 4-year window, depending on how fast you can get out of debt. There is still the same odds of being laid off (for example), but the consequences are not as devastating for someone with a paid for house.

I will agree that if you have a large enough cash account (emergency fund) it helps to reduce some of these risks, but your formulas never show this account — having this account will lower the ROR for the 30-year mortgage side. We can all agree, that someone with a mortgage needs a larger emergency fund than someone without.

Even the size of this cash account needs to be based on the 'risk' of needing liquid cash. What are the odds of two or more really bad things happening simultaneously — how much should be in the cash account then? This is especially true for the 30-year scenario, because of the longer time frame, the odds of two-or-more 'really bad things' happening during the window increase dramatically.

I can't quantify and put into a spreadsheet hard numbers for this stuff, but people know what I say to be true — as a lot of your (older?) readers are either paying extra on mortgages, or have finished paying them off early, while at the same time saying that they agree with you but just can't commit to your plan.

The commenter made an allocation choice by paying off his house. Yes, he could have done worse things with the money like spending it on conspicuous consumption. He didn't do that so he should be commended for that.

I'm just skeptical of his strategy for everyone.