I got the most expensive house that I could afford with a 30 year loan. And I truly do mean “afford.” As in, completely conventional. I hate moving, and I still absolutely love my house and neighborhood these 6.5 years later. Of course I have significantly more buying power these days, and with the depressed market, significantly more opportunities for getting into a bigger and fancier house, but why would I? Unless 11-Mile (it used to be 8-Mile) reaches me up here before I retire, I have no reason to sell.
Why do people get four and five year car loans? Same reason, I guess, but a car goes bad sooner.
I took a 30 year to keep the monthly payment as low as possible so I would be able to make it on unemployment if need be. And it was a couple different times. I later refinanced to a 15 and payed that off early.
Here’s a brief article that goes over some of the basics of what I mentioned upthread. This author’s view (and Ben Stein’s) is that with mortgage rates as low as they are, it’s better to invest the money you would have put into aggressively paying off a mortgage into an investment. Paying off a mortgage ASAP does not necessarily make the most financial sense.
You seem really focused on the amount of interest paid over the term of the loan.
What if I offered you a $1 million 100-year loan at 2% interest–would you take it?
House ownership is not necessarily a end in itself, but for most people it’s a means to an end. While I’m saving money by not paying off my mortgage as fast as possible, I’m able to spend it on other things and still have a roof over my head.
Why live on beans and toast for 15 years to pay off a mortgage? Pay it off over 30yrs and enjoy a steak now and again.
Well you guys have given me some good reasons. I still think some people do it irresponsibly, but not all.
If I’m confident I can invest the money at a higher rate, sure. I wouldn’t screw over my children/grandchildren by passing on such a debt though.
Well, there’s the answer to the question in the OP, then. The US stock market has returned 10% in every rolling 20-year period since 1929. So, I’m paying off my mortgage and student loans as slow as they’ll let me so I can increase the amount I have in the market.
If it returns 10% in 20 years, wouldn’t it be wiser to pay off a loan that costs 5% every year? Or do you mean it returns 10% per year when averaged over a 20-year period?
However, there are other factors at work - namely, risk. Most people’s goal is not simply to maximize the cash potential at the end of a certain period, but to do so with a certain acceptable minimum of risk.
Taking on a huge mortgage at a low rate and investing in equities can be a risky strategy. If mortgage rates go up, or the stock market crashes - you could easily be up shit’s creek. Paying off a mortgage fast is a low-risk strategy because, even if the real estate market tanks, if you do not plan to use your house as an investment you can still live in it and not care.
First, IANA economist, wealth manager, or anything like that. I’m a boring, low-risk, dollar-cost-averaging, dividend reinvesting investor with 30-year time horizons who puts his spare change in index funds every two weeks. I’d say the risk is minimal given the current fixed mortgage rates and the historical averages for the S&P500 or Dow in any 30-year period. Here’s a 20-year chart. Since 1931, no 20-year period has returned less than the current mortgage rate. The 30-year charts should look even better, but I can’t find any.) But that’s up to the individual home buyer. Personally, I probably would spread the risk by making a 20% down payment, taking a 30-year mortgage, and then perhaps paying off an extra hundred bucks or so a month to chip away at the principle and build equity, while taking advantage of the mortgage tax deduction. In other words, treat it as any other investment. I don’t necessarily think this is the most financially rational thing to do, given all the data, but there is the psychological benefit of not having a large outstanding loan that is appealing.
Of course, one of the things missing from the equation above is the appreciation of the home value. However, there is also the downside of the lack of liquidity. Lots of things to consider but, like I said above, a 30-year mortgage need not be a bad financial strategy.
First, at least here in Canada (your jurisdiction may vary), it is unusual to get a long-term mortgage with a “fixed interest” where the interest is “fixed” beyond the 5-year mark, which leaves one vulnerable to the possibility of high interest rates on a 30-year mortgage. Certainly, interest rates are at a low now, but if they should go through a period of rapid increase, as they did in the '80s, one could find oneself in trouble.
Second, I fully agree with taking advantage of any tax benefits. Alas, we do not enjoy the juicy mortgage interest deduction here! 
Third, my strategy is not so dissimilar - I divide my savings between topping up savings vehicles that maximize tax advantages (up here, Registered Retirement Savings Plans, in which you can put equities, among others) and making some extra-payments to get rid of the mortgage faster. Non-economic thinking plays its role I admit - being mortgage-free is something I look forward to, even if it is only a symbolic victory! 
I tend to purchase low-fee index-tracking mutual funds.
I look on appreciation of home value and maintenance costs as a wash (at best). If it’s a windfall, all the better - but since I have no particular plans to move, it will not really benefit me. Unless I need to squeeze out some equity on retirement … !
Fixed rates on long-term mortgages aren’t at all uncommon in the U.S. I’ve had two different 30-year fixed-rater mortgages, and I didn’t note anything unusual about them at the time they were initiated. They tend to have higher interest rates than variable-rate mortgages, of course.
Fair enough; that certainly adds sense to the strategy, by removing the risk of a ballooning rate. If your equities portfolio can be guaranteed to outperform the 30 year mortgage at the higher rate, there is no downside.
Which brings to mind - why would financial institutions invest in such an investment, if index funds are bound to do better?
That sucks. Here we have fixed mortgages and ARMs (adjustable rate mortages). ARMs serve their purpose, and can be used prudently and rationally, but a lot of people screwed themselves with ARMs during the housing bubble. When I hear most Americans talk about a mortgage, it’s a fixed-rate mortgage, and the quoted 5% rate refers to the 30-year fixed. 15-year mortgages and ARMs have lower rates. (The 15-year is around 4.4%, and the 5/1 year ARM–fixed rate for five years, adjustable each year thereafter–is around 3.2%.)
According to Wikipedia (I know, not reliable) in Canada one can get a 10-year fixed, but in my experience, 5-year fixed is more usual.
I think the more important issue is that we lack the mortgage interest tax break, which really adds incentive.
We paid off our mortgage several years ago. It was a low risk way to increase our cash flow and not pay interest.
Last year we took out a 4% loan against our house. At this point we have enough assets that its low risk, and we are doing better than that in the stock market. The loan for is is only 15 years and we will pay it off in seven (the time my oldest starts college) - that got us the biggest delta between interest rate and anticipated yield.
To build on Wheelz’ post, the unimproved land value of the 5000 sq ft lot my house sits on is $180,000. And this is a good neighborhood but not full of mansions. Just rows of 2-family houses with units between 1000 and 2000 sq feet. Round here, you could maybe get a lot to build on for $200k, if you could actually find an empty lot.