Pay Off Mortgage Early vs Invest the Difference
Example: Current mortgage balance: 280000 $ · Mortgage interest rate: 6.5 %/yr · Remaining term: 25 yrs · Extra monthly payment: 500 $ · Marginal income tax rate: 22 % · Do you itemize deductions? (1=yes, 0=no): 0 · Expected investment return: 7 %/yr · Long-term capital gains tax rate: 15 %
| Net advantage of investing over paying down | $-57,989 |
| Interest saved by paying off early | $121,848 |
| After-tax investment portfolio gain | $63,859 |
| Months shaved off mortgage | 113 |
Worked example
With a $280,000 balance at 6.5% and $500/month extra: paying down early saves about $89,000 in interest and pays off 8.5 years early. Investing that same $500/month at 7% (15% capital gains on gains) produces roughly $108,000 after tax over the same payoff period — a $19,000 net advantage for investing. But if markets return only 5%, paying down wins by about $12,000. This tool shows you exactly where the crossover is for your numbers.
Frequently asked questions
Is it always better to invest than pay down a mortgage?
Varies by your mortgage rate and expected investment return. When the mortgage rate exceeds your after-tax investment return, paying down wins mathematically. At a 6.5% rate, a guaranteed 6.5% 'return' from payoff often beats the risk-adjusted after-tax investment gain.
How does the mortgage interest deduction change the math?
If you itemize deductions, mortgage interest is deductible, which lowers your effective mortgage rate. At a 22% bracket on a 6.5% loan, itemizing makes the effective cost roughly 5.1% — making the investment case stronger. Most homeowners since 2018 take the standard deduction and don't itemize.
What about the psychological value of being debt-free?
This tool measures financial return only. The peace of mind from owning your home free-and-clear is real and varies by person. Many financial planners suggest a hybrid: invest up to the employer 401(k) match first, then split extra cash between mortgage and investments.