How the calculator works
You have the same extra cash every month and two places to put it. The calculator runs both plans month by month and compares your net worth (investments minus what you still owe on the mortgage) at the date you choose.
- Pay down the mortgage. Your regular payment plus the extra goes to the loan, so it is paid off early. From the month after payoff, the whole old payment plus the extra goes into investments.
- Invest the extra. You make only the scheduled payment and invest the extra each month. Once the loan ends on schedule, the old payment is invested too.
Investments grow monthly at your expected return minus the tax drag you enter, divided by 12. That is the same compounding idea used by the SEC's Investor.gov compound interest calculator. If you itemize, the tax you save on each month's interest is invested in both plans. The break-even return is found by testing returns until both plans finish level.
Worked example
You owe $300,000 at 6.5% with 300 months (25 years) left, so your payment is about $2,026. You have $500 extra each month. You take the standard deduction, assume a 6% return, and expect 0.5% a year lost to taxes and fees. You compare after 25 years.
| Return you assume | Pay down: net worth | Invest: net worth | Better choice |
|---|---|---|---|
| 4% | $323,939 | $239,284 | Pay down |
| 6% | $356,547 | $321,019 | Pay down |
| 8% | $393,433 | $438,630 | Invest |
Prepaying clears the loan in 15 years 11 months instead of 25 years and avoids about $125,600 of interest. After that you invest $2,526 a month for the remaining nine years. The break-even return is 7.0%: your 6.5% mortgage rate plus the 0.5% drag. Below that, paying down wins. Above it, investing wins, and the gap grows the higher the return.
Things the math leaves out
- Liquidity. Money paid into your home is hard to get back without selling or borrowing. Keep an emergency fund first; see the homeowner emergency fund calculator.
- Tax-advantaged accounts. Money invested in a 401(k) or IRA may have little tax drag, and an employer match is an immediate return. Enter a lower drag to model that.
- The deduction. Interest only lowers your tax if you itemize. Check with the mortgage interest deduction calculator before choosing “yes”.
- Prepayment rules. Ask your servicer to apply extra payments to principal, and check your note for any prepayment penalty.
- Adjustable rates. The calculator assumes a fixed rate. If your rate can rise, paying down debt becomes more attractive.
What to do next
See exactly how extra payments shorten your loan with the extra mortgage payment calculator, or lower your payment without refinancing using the mortgage recast calculator. Our guide to paying off your mortgage early vs investing covers the non-math side of the decision.