Should you pay off your mortgage early or invest?
Worked examples computed with the same calculations as our calculators.
Short answer
It's closer than it looks. In our example, paying an extra $200 a month on a 6.5% mortgage saves $111,892 in interest and pays the loan off 5 years and 7 months early. But measured by what you'd actually have after 10 years, it beats investing the same $200 by only $1,648. Investing wins if your investments return more than 7.04% a year.
Below, the example is worked through with the same math as our pay extra vs. invest calculator.
The example
- A $500,000 home with 20% down: a $400,000 loan at 6.5% for 30 years
- One person pays an extra $200 toward the loan every month. The other invests that $200 instead, at 6% a year, with gains taxed at 15%.
- Once the loan is paid off, the person who paid extra invests their whole freed-up payment, so both spend the same every month.
- Both sell after 10 years
Why the interest saved isn't the whole story
"$111,892 saved" is real, but it's the wrong number to compare. Most of it comes decades from now, in the years you no longer have a payment. By year 10, paying extra has saved $9,681 of interest. Meanwhile, the investor's $200 a month has been growing too.
What matters is what each person has when they sell. After 10 years, the one who paid extra has $328,772 (their home equity after selling costs) and the investor has $327,124 (smaller equity plus their investments, after tax). That's a difference of $1,648. If you hold on for the full 30 years, it grows to $23,503.
The return that decides it
Paying extra earns you roughly your mortgage rate, 6.5%, with no risk. Investing earns whatever markets do, minus tax on the gains. So it comes down to the return you expect:
| Investment return | Who's ahead |
|---|---|
| 4% a year | Paying extra +$4,508 |
| 5% a year | Paying extra +$3,126 |
| 6% a year | Paying extra +$1,648 |
| 7% a year | Paying extra +$66 |
| 8% a year | Investing +$1,629 |
| 10% a year | Investing +$5,392 |
The tipping point is about 7.04%. Below it, paying extra comes out ahead; above it, investing does. Either way, the gap is small next to the $111,892 headline.
How sure is the answer?
Market returns swing a lot from year to year, while the mortgage rate doesn't. We reran the example across 300 simulated futures. Paying extra came out ahead in 58% of them. Even at an 8% expected return, where investing wins on average, paying extra still came out ahead in 46% of futures, because a bad decade for markets doesn't hurt a paid-down mortgage.
What matters more than the math
- Money in your house is hard to get back. Investments can be sold if you need cash; home equity takes a loan or a sale. Build an emergency fund first.
- Pay off higher-rate debt first, such as credit cards or car loans, and take any employer retirement match. Those beat both options here.
- Tax-advantaged accounts change the math. This example taxes investment gains; investing in a retirement account would favor investing more.
- Peace of mind counts. If being debt-free sooner matters to you, paying extra costs little even when investing wins on paper.
- See how the numbers work for the full set of assumptions.
Try it with your own loan, extra payment, and expected return. It starts from this example.
Open the pay extra vs. invest calculator