How the comparison works
Both paths spend exactly the same money every month: your mortgage payment plus the extra amount. On theinvest path you pay the mortgage as scheduled and invest the extra. On the pay extra path you put the extra toward principal; once the mortgage is gone you invest the whole amount you were paying. We compare what each path has invested on the date your mortgage would have ended anyway, after tax on gains.
The break-even return
Paying down a mortgage earns exactly its interest rate, guaranteed. With no tax on gains, investing has to beat that same rate to come out ahead. Tax on investment gains raises the bar. For a $300,000 balance with 25 years left and $500 a month extra:
| Mortgage rate | Break-even, no tax | Break-even, 15% tax on gains | Investing at 7% (15% tax) vs paying extra |
|---|---|---|---|
| 4% | 4.00% | 4.43% | +$83,668 |
| 5% | 5.00% | 5.48% | +$53,015 |
| 6% | 6.00% | 6.51% | +$18,253 |
| 6.5% | 6.50% | 7.02% | −$769 |
| 7% | 7.00% | 7.53% | −$20,934 |
| 7.5% | 7.50% | 8.03% | −$42,278 |
Calculated with the same engine as the calculator above.
What the numbers leave out
- Risk. Paying extra is a guaranteed return. Investment returns vary, and a bad decade can reverse the answer.
- Access to cash. Money in your house is hard to get back without selling or borrowing. Investments can be sold, though selling may be taxed.
- Order of priorities. Many people build an emergency fund, pay off higher-interest debt and take any employer 401(k) match before either option.
- Peace of mind. Owning your home outright has value that no spreadsheet captures. That's a legitimate reason to prepay.
For the full decision, including what to do first and when paying down the loan clearly wins, read should you pay off your mortgage early?
Questions people ask
Is it better to pay off my mortgage early or invest?
It depends on the return you can reliably earn compared with your mortgage rate. Paying extra earns exactly your mortgage rate with no risk. Investing can earn more on average but can also lose money, especially over short periods. The calculator shows the return investing needs to beat prepaying.
What return should I assume for investing?
No one knows future returns. Many planners test a range, such as 4% to 8% a year for a diversified stock portfolio, after fees. Try several numbers and look at the break-even return rather than a single answer.
Does the mortgage interest tax deduction change the answer?
Only if you itemize deductions, which most filers don't. If you do, your effective mortgage rate is a bit lower, which makes investing slightly more attractive. This calculator doesn't include the deduction.
What about retirement accounts?
Tax-advantaged accounts change the math. An employer 401(k) match is an instant return that prepaying can't beat, and gains inside a 401(k) or IRA aren't taxed yearly. Set the tax on gains to 0% to approximate a Roth account.
For education and estimates only; not financial, tax or legal advice. Your lender's figures are final. See How we calculate.