Note: This calculator provides an estimate. Actual results may vary due to taxes, fees, market fluctuations, and changes in interest rates or personal financial situations. Consult with a financial advisor for personalized advice.
Understanding the Mortgage Payoff vs. Investing Decision
Deciding whether to aggressively pay down your mortgage or invest the extra funds is a common financial dilemma. Both strategies have merit, and the optimal choice often depends on your individual financial situation, risk tolerance, and market conditions. This calculator helps you compare the potential outcomes of these two popular strategies.
The Logic Behind the Calculator
This calculator models two scenarios over your specified investment horizon:
Scenario 1: Aggressive Mortgage Payoff: We calculate the total amount of interest saved and the accelerated payoff timeline by adding your "Extra Monthly Mortgage Payment" to your regular mortgage payment.
Scenario 2: Investing Extra Funds: We calculate the future value of your investments, including your "Additional Monthly Investment" and the compounding growth at your "Expected Annual Investment Return."
Key Calculations
Mortgage Payoff Calculation:
The core of the mortgage payoff calculation involves simulating the loan amortization with the extra payment. While a full amortization schedule is complex for a simple calculator, we approximate the total interest saved and the time to payoff.
The formula for the monthly payment (M) of a loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]
Where:
P = Principal loan amount
i = Monthly interest rate (Annual rate / 12)
n = Total number of payments (Loan term in years * 12)
By adding an extra payment, we effectively shorten the loan term. The calculator estimates the total interest saved by comparing the total payments made with and without the extra payment, up to the specified investment horizon or until the mortgage is paid off.
Investment Growth Calculation:
This calculation uses the future value of an annuity formula to project the potential growth of your investments.
FV = Pmt [ ((1 + r)^t – 1) / r ]
Where:
FV = Future Value of the investment
Pmt = Total monthly payment (Additional Monthly Investment)
t = Total number of periods (Investment Horizon in Years * 12)
This formula calculates the total accumulated value, assuming regular contributions and compounding returns. It does not account for taxes on gains or investment fees, which would reduce the actual return.
Factors to Consider
Risk Tolerance: Paying down a mortgage is a guaranteed, risk-free return equal to your mortgage interest rate. Investing involves market risk, meaning you could earn more or less than your expected return, potentially even losing money.
Guaranteed Return vs. Potential Higher Return: Your mortgage interest rate represents a guaranteed "return" on your payoff money. If your expected investment return consistently exceeds your mortgage rate (after accounting for risk and taxes), investing may be more lucrative.
Psychological Benefit: Many people find significant peace of mind in being mortgage-free. The feeling of financial security can be invaluable.
Liquidity: Money paid towards your mortgage principal is generally not easily accessible. Invested funds, depending on the type of investment, can be more liquid.
Tax Implications: Mortgage interest may be tax-deductible for some homeowners (consult a tax professional). Investment gains are typically subject to capital gains taxes.
Current Economic Climate: High inflation might make paying down debt with a fixed, lower-interest rate more appealing. Low-interest rate environments might favor investing for potentially higher returns.
How to Use the Calculator
Enter your current Mortgage Balance.
Input your Mortgage Annual Interest Rate (e.g., 3.5 for 3.5%).
Specify the Extra Monthly Mortgage Payment you can afford.
Set the Investment Horizon in years you want to compare.
Enter your Expected Annual Investment Return (as a percentage). Be realistic, as past performance is not indicative of future results.
Specify the Additional Monthly Investment you plan to make if you choose to invest instead of paying extra on the mortgage.
Click "Calculate Comparison" to see the estimated outcomes.
The results will show you the projected outcome of aggressively paying down your mortgage versus investing the difference, helping you make a more informed financial decision.
function calculateComparison() {
// Get input values
var mortgageBalance = parseFloat(document.getElementById("mortgageBalance").value);
var mortgageInterestRate = parseFloat(document.getElementById("mortgageInterestRate").value);
var additionalMortgagePayment = parseFloat(document.getElementById("additionalMortgagePayment").value);
var investmentHorizon = parseInt(document.getElementById("investmentHorizon").value);
var expectedInvestmentReturn = parseFloat(document.getElementById("expectedInvestmentReturn").value);
var additionalInvestment = parseFloat(document.getElementById("additionalInvestment").value);
// — Input Validation —
if (isNaN(mortgageBalance) || mortgageBalance <= 0) {
alert("Please enter a valid current mortgage balance.");
return;
}
if (isNaN(mortgageInterestRate) || mortgageInterestRate < 0) {
alert("Please enter a valid mortgage annual interest rate.");
return;
}
if (isNaN(additionalMortgagePayment) || additionalMortgagePayment < 0) {
alert("Please enter a valid extra monthly mortgage payment.");
return;
}
if (isNaN(investmentHorizon) || investmentHorizon <= 0) {
alert("Please enter a valid investment horizon in years.");
return;
}
if (isNaN(expectedInvestmentReturn) || expectedInvestmentReturn < 0) {
alert("Please enter a valid expected annual investment return.");
return;
}
if (isNaN(additionalInvestment) || additionalInvestment < 0) {
alert("Please enter a valid additional monthly investment.");
return;
}
// — Mortgage Payoff Calculation —
var monthlyMortgageRate = mortgageInterestRate / 100 / 12;
var totalMonths = investmentHorizon * 12;
var currentMortgageBalance = mortgageBalance;
var remainingBalanceForPayoff = mortgageBalance;
var totalInterestPaidOnExtra = 0;
var monthsToPayoff = 0;
var totalPaidTowardsPrincipalExtra = 0;
// Simulate mortgage payoff with extra payments
for (var i = 0; i < totalMonths; i++) {
if (remainingBalanceForPayoff remainingBalanceForPayoff) {
paymentAmount = remainingBalanceForPayoff;
interestPayment = remainingBalanceForPayoff * monthlyMortgageRate;
principalPayment = remainingBalanceForPayoff – interestPayment;
}
remainingBalanceForPayoff -= principalPayment;
totalInterestPaidOnExtra += interestPayment;
totalPaidTowardsPrincipalExtra += principalPayment;
monthsToPayoff++;
}
var payoffOutcomeText = "By paying an extra $" + additionalMortgagePayment.toFixed(2) + "/month on your mortgage for up to " + investmentHorizon + " years:\n";
if (remainingBalanceForPayoff <= 0) {
payoffOutcomeText += "You could potentially pay off your mortgage in approximately " + monthsToPayoff + " months.\n";
payoffOutcomeText += "Estimated total interest saved: $" + (totalInterestPaidOnExtra).toFixed(2) + ".\n";
payoffOutcomeText += "Total paid towards mortgage: $" + (mortgageBalance + totalInterestPaidOnExtra).toFixed(2) + " (estimated total over payoff period).";
} else {
var currentInterestPaid = 0;
var tempBalance = mortgageBalance;
for (var i = 0; i < totalMonths; i++) {
if (tempBalance <= 0) break;
var interest = tempBalance * monthlyMortgageRate;
var principal = additionalMortgagePayment – interest;
if (principal < 0) principal = 0; // Ensure principal isn't negative if interest is high
if (tempBalance – principal 0) {
futureValue = additionalInvestment * (((Math.pow(1 + monthlyInvestmentRate, totalMonths) – 1) / monthlyInvestmentRate));
} else {
// If rate is 0, it's just the sum of investments
futureValue = additionalInvestment * totalMonths;
}
totalInvested = additionalInvestment * totalMonths;
var investmentOutcomeText = "By investing an extra $" + additionalInvestment.toFixed(2) + "/month for " + investmentHorizon + " years:\n";
investmentOutcomeText += "Your total contributions would be $" + totalInvested.toFixed(2) + ".\n";
investmentOutcomeText += "The estimated future value of your investments could be approximately $" + futureValue.toFixed(2) + ".\n";
investmentOutcomeText += "This represents an estimated growth of $" + (futureValue – totalInvested).toFixed(2) + ".";
// — Net Difference Calculation —
var netDifference = futureValue – totalInterestPaidOnExtra; // Simplified comparison: future value vs interest saved
var netDifferenceText = "";
if (remainingBalanceForPayoff totalInterestPaidOnExtra) {
netDifferenceText += "\nInvesting appears potentially more beneficial by approximately $" + (futureValue – totalInterestPaidOnExtra).toFixed(2) + ".";
} else {
netDifferenceText += "\nPaying off the mortgage appears potentially more beneficial by approximately $" + (totalInterestPaidOnExtra – futureValue).toFixed(2) + ".";
}
} else { // Mortgage not paid off within horizon
var interestPaidDuringHorizon = 0;
var balanceAfterHorizon = mortgageBalance;
for(var i=0; i<totalMonths; i++){
if(balanceAfterHorizon <= 0) break;
var interest = balanceAfterHorizon * monthlyMortgageRate;
var principal = additionalMortgagePayment – interest;
if(principal < 0) principal = 0;
if (balanceAfterHorizon – principal 0) {
netDifferenceText += "\nInvesting appears potentially more advantageous by approximately $" + netAdvantage.toFixed(2) + ".\n";
} else {
netDifferenceText += "\nPaying off the mortgage appears potentially more advantageous by approximately $" + Math.abs(netAdvantage).toFixed(2) + ".\n";
}
netDifferenceText += "(Note: This comparison is simplified. It compares total potential investment value against the interest paid on the mortgage over the period. A more precise comparison would involve comparing guaranteed savings vs. risked returns.)";
}
// Display results
document.getElementById("payoffOutcome").innerText = payoffOutcomeText;
document.getElementById("investmentOutcome").innerText = investmentOutcomeText;
document.getElementById("netDifference").innerText = netDifferenceText;
}