Pay Off Mortgage Early or Invest? The Real Math

If your mortgage rate is well below what you expect to earn from investing, investing usually wins; if your rate is close to that return, paying off the mortgage is about as good and carries no risk. On a $350,000 loan at 3%, investing an extra $500 a month instead of prepaying leaves you roughly $250,000 ahead after 30 years at a 7% return. At 6.5%, the two paths end up within about $45,000 of each other in a retirement account, and nearly tied in a taxable account.

The math is only half of the decision. Your emergency savings, other debts, retirement match and how you feel about debt all matter. This guide walks through the numbers, then gives you a checklist.

The Short Answer in One Table

A new $350,000, 30-year fixed mortgage. You have an extra $500 a month and two choices: add it to the mortgage payment, or invest it. In the prepay path, once the loan is gone you invest the full freed-up payment plus the $500 until year 30, so both paths spend exactly the same money each month for 30 years. Investments earn 7% a year (nominal), compounded monthly.

Both paths end with the house paid off by year 30. The difference is what is sitting in your investment account. Try your own loan in the mortgage payoff calculator.

Worked Example 1: The 6.5% Mortgage

The regular payment on $350,000 at 6.5% is $2,212.24 a month, and over 30 years you would pay $446,406 in interest.

• Prepay: paying $2,712.24 a month clears the loan in 223 months. Total interest drops to $252,803, a saving of $193,603. You then invest $2,712.24 a month for the last 137 months, which grows to $566,562 at 7%.
• Invest: you pay the normal $2,212.24 for 30 years and invest $500 a month from the start. At 7% that grows to $609,985.

Investing comes out about $43,000 ahead, but only if you actually earn 7% every year and never touch the money. That gap is a reward for taking market risk. Prepaying a 6.5% loan earns a guaranteed 6.5%, which is hard to find anywhere else with no risk.

Another way to see it: at the moment the prepayer becomes debt-free (month 223), the investor still owes $213,569 on the mortgage and has $227,872 invested. Selling the investments to pay off the loan would leave only about $14,000, before any taxes on the gains.

Worked Example 2: The 3% Mortgage

The regular payment on $350,000 at 3% is $1,475.61 a month, with $181,221 of interest over 30 years.

• Prepay: with $500 extra the loan is gone in 235 months and you save $68,341 in interest. Investing $1,975.61 a month for the remaining 125 months grows to $362,033.
• Invest: $500 a month for 30 years at 7% grows to $609,985.

Investing wins by about $248,000. When your loan costs 3% and a high-yield savings account or Treasury bill pays more than that, prepaying is hard to justify on the numbers alone.

What Changes in a Taxable Account

The table assumes a 401(k) or IRA, where growth is not taxed along the way. In a regular brokerage account, you pay tax on gains. If we assume a 15% long-term capital gains tax on all the growth at year 30:

At 6.5% the gap shrinks to about $8,000, which is effectively a tie. In real life, dividends in a taxable account are taxed every year and fees nibble at returns too. If those drag your return from 7% down to 6%, prepaying the 6.5% mortgage pulls ahead: $531,810 versus $502,258 before the final tax bill.

Your After-Tax Mortgage Rate (Probably the Full Rate)

People often say the mortgage interest deduction makes a mortgage "cheaper." For most borrowers in 2026 it does not, because you only get the deduction if you itemize, and itemizing only helps when your deductions beat the standard deduction: $16,100 for single filers and $32,200 for married couples filing jointly (IRS Rev. Proc. 2025-32).

In the first year of the 6.5% loan above, you pay about $22,635 in interest. For a married couple with $10,000 of state and local taxes, total itemized deductions are $32,635, just $435 above the standard deduction. At a 22% tax rate that is worth about $96 for the year. Their after-tax mortgage rate is still essentially 6.5%, and the benefit shrinks every year as the interest portion of the payment falls.

So for most households, compare your full mortgage rate with your expected investment return. Only if you itemize well above the standard deduction should you use a lower, after-tax mortgage rate.

Risk and Liquidity: What the Spreadsheet Misses

• Prepaying is guaranteed; investing is not. The 7% return is a long-run average. Stocks have had decade-long stretches of poor returns.
• Home equity is hard to reach. Money you prepay is locked in the house. If you lose your job, the bank still wants the full monthly payment; your extra payments do not let you skip one. Getting the equity back means a home equity loan, which needs income to qualify, or selling.
• Investments are flexible. A brokerage account can be sold in days. Retirement accounts can be tapped too, though early withdrawals usually carry taxes and penalties.
• Check for a prepayment penalty. Some loans charge a fee for paying off all or a large part of the balance early, usually within the first three or five years. Small extra principal payments typically do not trigger it, but confirm with your lender (CFPB).
• Peace of mind counts. Many people sleep better with no mortgage, especially going into retirement when income is fixed.

A Simple Decision Checklist

Work through these in order. Stop at the first one that is not yet done.

1. Emergency fund: do you have 3 to 6 months of expenses in savings? If not, build that first.
2. Employer match: are you contributing enough to your 401(k) to get the full match? A match is an instant return that beats any mortgage rate.
3. High-interest debt: are credit cards and other loans above your mortgage rate paid off? Pay those first.
4. Compare rates: is your mortgage rate below about 4 to 5%? Investing likely wins. Above about 6%? Prepaying is a strong, risk-free option. In between, it is close.
5. Time to retirement: do you want the mortgage gone before you stop working? Prepaying can make that happen.
6. Comfort with risk: would a 30% market drop make you sell? If so, the guaranteed return of prepaying may suit you better.

The Hybrid Approach: Do Both

You do not have to pick one. Split the $500: put $250 toward the 6.5% mortgage and invest $250.

• The loan is paid off in 273 months (22 years, 9 months), saving $126,604 in interest.
• Investing $250 for 30 years, plus the freed-up payment after payoff, gives about $583,023 at year 30, between the all-prepay ($566,562) and all-invest ($609,985) results.

You keep some flexibility, lock in a guaranteed return on part of your money, and still get the mortgage gone years early.

If you get a lump sum, such as a bonus or inheritance, a mortgage recast lets you pay down principal and have the lender lower your monthly payment, which frees up cash flow rather than shortening the term. See exactly where each payment goes with the amortization schedule calculator, and model the investing side with the investment calculator. If your rate is high, also check whether refinancing is worth it before you start prepaying.

Frequently asked questions