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<<"Which scenario is more conservative ? Which is safer ?">>

If you had a 'paid for' house, you could easily get a home equity loan for a considerable portion of the house, worse come to worse.

Do banks give home equity loans to people who don't have jobs ? Also, in a major liquidity crisis, almost nobody gets loans at all.

Or what happens if you had put all your money into Nasdaq? Or anything, that could go down 80%, and stay there for five years????

Go back and see my description of scenario 2. You hold enough cash to pay off the mortgage, but you hold it rather than the mortgage bank holding it.
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