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Pay off the mortgage early or invest?

Extra money can go toward the mortgage, which earns a certain return equal to its rate, or into investments, which may earn more but can also lose value.

This calculator follows both choices month by month with the same budget and compares what each has built by the original payoff date.

  • Formula and assumptions shown
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Inputs

The amount you could either add to the mortgage payment or invest each month.
A constant annual assumption, compounded monthly. Actual returns vary and can be negative.
Share of investment returns lost to taxes each year, if any. 15 turns a 7% return into 5.95%.

Results update as you type. Amounts in USD. Rates are your own assumptions.

Result

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Assumptions used

Calculated result—

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Notes and methodology

What decides it

Mortgage rate versus after-tax return
If investments earn exactly the mortgage rate after taxes, both paths finish even. Above that break-even, investing finishes ahead; below it, paying early does.
Risk
Prepaying earns the mortgage rate with certainty. Market returns vary year to year and over shorter periods can be negative.
Liquidity
Money paid into the house can only be reached by selling or borrowing against it. Invested money in taxable accounts can usually be sold.
Other priorities
FINRA notes that paying off high-interest debt can beat typical investment returns. Emergency savings and employer retirement matches usually come before either choice.

How it works

Formula

Both paths spend payment + extra each month. Pay off early: the extra goes to principal until the balance is zero, then the whole amount is invested. Invest: the extra is invested every month. Investments grow at return × (1 − tax drag) ÷ 12 monthly, with contributions at month end.

Read the full methodology

Assumptions

  • The mortgage is fixed-rate with monthly payments; interest is the annual rate ÷ 12 on the remaining balance.
  • The investment return is one constant annual assumption; tax drag reduces it proportionally, and fees beyond that are excluded.
  • Both paths end with no mortgage, so home value is left out. Mortgage-interest deductions and prepayment penalties are excluded.

Worked example

$250,000 at 6.5% with 300 months left and $500 a month extra

The regular payment is $1,688.02. Investing the $500 each month at 7% grows to $405,035.85 by month 300. Paying it toward the mortgage instead clears the loan in month 179, then investing the full $2,188.02 a month reaches $384,965.84 by month 300. Investing comes out ahead by $20,070.00 under a constant 7% return; at 6.5% after tax the two would finish even.

Step by step

  1. Set the monthly budget. $250,000 at 6.5% ÷ 12 over 300 months is $1,688.02 a month. Both paths spend $1,688.02 + $500 = $2,188.02 each month.
  2. Pay off early. Sending $2,188.02 to the loan clears it in month 179, 121 months (10 years 1 month) early, and saves $115,668.35 of interest.
  3. Invest after the payoff. Whatever the final payment leaves over in month 179, and the full $2,188.02 in each month after it, is invested at 7% ÷ 12. By month 300 that portfolio is $384,965.84.
  4. Invest from the start instead. $500 a month for 300 months at 7% ÷ 12 grows to $500 × ((1 + 0.07 ÷ 12)^300 − 1) ÷ (0.07 ÷ 12) = $405,035.85, while the regular payment runs the full term.
  5. Compare at the original payoff date. Both paths end with no mortgage, so the difference is the two portfolios: $405,035.85 − $384,965.84 = $20,070.00 in favor of investing.

How to read your result

The headline names the path with more invested at the original payoff date and by how much. The summary gives the early payoff month and the break-even after-tax return, which is the mortgage rate. The results add the regular payment, both portfolios, the months saved, the interest saved by paying early, and the after-tax return used.

The chart and table track net worth for both paths each month: investments minus the mortgage balance. Each extra dollar either earns the 7% return or avoids 6.5% interest on the loan, so the two lines stay close and the gap widens slowly: investing leads by $459.47 at month 60, $6,607.53 at month 179, and $20,070.00 at month 300. With a return below the mortgage rate the order reverses. Home value is left out because it is the same on both paths.

Interest saved by paying early is certain once the payments are made; the investment return is not. The model uses one constant return, so it cannot show a market fall just before the payoff date. Tax drag is a single proportional cut to returns, and the mortgage-interest deduction, investment fees, liquidity, and prepayment penalties are outside the result.

What changes the result most

Investment return
At 6.5%, equal to the mortgage rate, the two paths finish even. At 8%, investing leads by $68,315.75; at 5%, paying early leads by $47,127.80.
Tax drag
A 15% tax drag turns the 7% return into 5.95%, below the 6.5% mortgage rate, and paying early then leads by $19,388.07.
Extra monthly amount
The amount changes the size of the gap, not its direction. At $1,000 a month the loan clears in month 130 and investing leads by $30,204.77; at $250 it clears in month 223 and investing leads by $12,079.27.

Questions

Is it better to pay off a mortgage early or invest?

The arithmetic turns on the after-tax investment return compared with the mortgage rate. Higher expected returns favor investing but come with risk; prepaying earns the mortgage rate with certainty.

What return does investing need to beat paying off the mortgage?

An after-tax return equal to the mortgage rate. In this model the two paths tie at exactly that return, because every dollar earns the same monthly rate either way.

Are there penalties for paying a mortgage off early?

Some loans have a prepayment penalty, usually for paying off the whole balance in the first few years. Small extra principal payments usually are not penalized; the CFPB suggests asking the lender what triggers one.

What happens once the mortgage is paid off?

The principal and interest payment ends, but property tax and homeowners insurance continue. This model invests the freed-up payment from then on.

Does the mortgage-interest deduction change the result?

For taxpayers who itemize, the deduction lowers the effective mortgage rate. The model does not estimate it; entering a lower mortgage rate is one way to test the effect.

How can I pay off a mortgage faster?

Any amount paid above the scheduled payment and applied to principal shortens the loan: a fixed extra amount each month, a yearly lump sum, or biweekly half-payments, which add up to one extra monthly payment a year. In the example, $500 extra a month clears a $250,000, 300-month loan at 6.5% in month 179 and saves $115,668.35 of interest. Refinancing to a shorter term also shortens it but adds closing costs.

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Sources

These references explain the concepts behind the calculation. They do not endorse this site. Estimates leave out any cost or condition you did not enter.