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Mortgage Prepayment vs Investing

Where should extra money go?

About this calculator

If you have money left over each month after your regular mortgage payment, you can send it to the lender as extra principal or put it in an investment account. Prepaying earns a guaranteed return equal to your mortgage rate, because every dollar of principal you pay off stops charging interest. Investing earns whatever the markets deliver, which may be more or less than that rate. This calculator runs both plans month by month with the same budget and compares your net worth at the end, so you can see which choice leaves you better off and by how much.

How to use this calculator

Enter your Mortgage Balance, the Mortgage Rate and the Remaining Term in whole years, then the Extra Money per Month you can spare. Enter the Expected Investment Return you think a portfolio could earn, and the number of Years to Compare. Under Advanced assumptions, set the Tax Rate on Investment Gains: 15% fits long-term gains in a taxable brokerage account for most households, and 0% fits a Roth IRA. Results update as you type, and every input is saved in the page address, so you can bookmark or share a scenario.

The method

Both plans spend exactly the same amount every month: the regular principal and interest payment plus the extra money. In the Prepay plan the extra goes to principal each month, which shortens the loan; once the loan is paid off, the whole former payment plus the extra is invested every month until the end of the comparison. In the Invest plan you make only the regular payment and invest the extra each month; if the loan ends before the horizon, the full payment is invested from then on too. Investments grow at the expected return divided by 12 each month, with deposits at the end of the month. At the horizon, tax is charged on the investment gains, as if the account were cashed out. Net worth is the investments after that tax minus the mortgage balance still owed. The home's value is the same under both plans, so it is left out of both figures. The break-even return is the investment return at which both plans end with the same net worth, found by trying returns until the gap closes.

Worked example using the default values

A $300,000 balance at 6.5% with 25 years left has a regular payment of $2,026 a month. With $500 a month of extra principal, the loan is paid off in 15 yr 11 mo instead of 25 years, and you save $125,588 of interest over the life of the loan. From then on, $2,526 a month goes into investments. After 25 years, at a 7% return and 15% tax on gains, the Prepay plan ends with a net worth of $367,549 and the Invest plan with $366,780, so prepaying comes out ahead by $769. The break-even return is 7.02%: investing would need to earn more than that to win.

Interpreting the results

The headline names the plan with the higher net worth at the horizon and the size of the gap. A small gap means the decision barely matters financially, and other things should decide it, such as how much you value being debt-free or keeping cash available. The break-even return is the most useful figure: if you are confident your investments will beat it after fees, investing is likely to win; if not, prepaying is the safer choice. Without taxes, the break-even return equals the mortgage rate, because paying off a loan that charges 6.5% is the same as earning 6.5% on that money. Tax on investment gains raises the bar, but by less than the full tax rate, because the tax is only paid when the account is cashed out. The chart shows net worth year by year: the Prepay line rises faster once the loan is gone, while the Invest line starts with a head start in savings.

Practical tips

Before prepaying, keep an emergency fund and collect any employer match on retirement contributions, since a match is an immediate return that prepaying cannot beat. Pay off higher-rate debt such as credit cards first. Ask your lender to apply extra payments to principal and check that your loan has no prepayment penalty. If you invest instead, do it consistently: the comparison assumes the money is invested every month, not spent. Try a lower expected return to see how much the answer depends on it.

Limitations

The investment return is constant here, while real markets go up and down, and a bad decade near the end of the comparison can change the result. Prepaying is guaranteed; investing is not. The calculator ignores the mortgage interest deduction, which benefits only households that itemize, and it charges tax on gains once at the end rather than each year. It does not model property taxes, insurance or PMI, which are the same under both plans unless prepaying ends PMI sooner. Money sent to the mortgage is hard to get back without refinancing or selling, while investments can be sold when needed. Results are estimates for planning, not financial advice.

Frequently Asked Questions

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