So, in essence you're in favor of option B (use the money to invest in something that will net you more in the end), specifically in CDs, or possibly a money market account. Thanks for bringing that up. The CDs are FDIC insured and are a strong case for not paying off the mortgage.
You forgot to deduct the income tax from the interest generated by the CD.
Re:10 Things Millionaires Won't Tell You
by mattmaroon on Friday August 29, 2008 @01:35AM
(#289849)
True, that's because I'd sooner invest in stocks and only pay capital gains.
So to clarify the math, you borrow $200k, pay $12k in interest, but get to deduct it and therefore save $3.6k, thus really paying $8.4k in interest (or 4.2% of the $200k).
Therefore if you mortgage the house (as opposed to buying it outright) and buy into a CD at 5.25% you're effectively gaining 1.05% interest for free. You're making about $2k a year. Also you're increasing your credit score, which saves you a lot of money in the long run.
In your above scenario the guy was saving 30% of 5% (1.5%, or 1500) which would put him at 3.5%. He'd be borderline retarded to pay for the house outright.
Much more intelligent (especially for someone my age, who has a good 30 years to worry about retirement, thus reducing the volatility) is to put that $200k into the market, which will probably average somewhere between 7-10% in that time. Suddenly that $200k mortgage turns into a shit ton of money in my retirement account.
Also, there's the fact that the mortgage costs only slightly more than renting a similar place (if homes as nice as mine were available for rent, which they generally aren't here) yet in 30 years I have a free and clear home I can sell.
In summation, mortgages FTW. That's why very wealthy people who could afford not to still damn near always get them.