Invest vs Pay off Mortgage Calculator

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Reviewed and Fact-Checked by:

David Chen, CFA

Certified Financial Analyst

Deciding whether to aggressively pay off your mortgage or invest those extra funds is one of the biggest financial choices you’ll make. This calculator helps you compare the estimated future value of both options to determine which path offers the greater net gain.

Invest vs Pay Off Mortgage Calculator

Result:

Please enter valid positive numbers for all fields.

Detailed Calculation Steps

Invest vs Pay Off Mortgage Calculator Formula

The calculation compares two main values over the remaining original mortgage term ($N_{orig}$):

Option 1: Investment Future Value ($FV_{Invest}$)

$$ FV_{Invest} = A \cdot \frac{(1 + i)^n – 1}{i} $$

Where:

$A$ = Additional Monthly Payment

$i$ = Monthly Investment Rate ($R2 / 1200$)

$n$ = Total Number of Months Remaining ($N1 \cdot 12$)

Option 2: Total Interest Saved ($I_{Saved}$)

This is calculated by finding the total interest paid under the original term vs. the new, shorter term with the additional payment, $A$.

Decision: If $FV_{Invest}$ > $I_{Saved}$, investing is preferred.

Formula Sources: Investopedia (Annuity FV), The Balance (Loan Amortization)

Variables

The calculator uses the following inputs:

  • Current Mortgage Balance: The remaining principal amount owed on your home.
  • Mortgage Interest Rate: The annual percentage rate (APR) of your current mortgage.
  • Remaining Mortgage Term: The number of years left on the original loan schedule.
  • Additional Monthly Payment: The extra amount you plan to either pay towards your mortgage principal or invest monthly.
  • Investment Rate of Return: The expected average annual return you anticipate from your investments.

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What is Invest vs Pay Off Mortgage Calculator?

This financial comparison tool helps a homeowner determine the better use of surplus cash: dedicating it to paying off the mortgage principal faster (thus saving future interest) or allocating it to an investment vehicle (such as stocks or bonds) for potential growth. It is a time value of money analysis that pits a guaranteed, risk-free rate of return (the mortgage interest rate) against a higher, but riskier, market-based rate of return.

The core principle is simple: if the expected after-tax return on investment is greater than the after-tax interest rate on the mortgage, investing is typically the mathematically superior choice. However, the calculator also implicitly measures the non-financial benefit of paying off debt, such as the psychological security of being debt-free and the reduction in required monthly expenses.

How to Calculate Invest vs Pay Off Mortgage (Example)

Follow these steps to understand the comparison process:

  1. Determine the Original Baseline: Calculate the original monthly payment and total interest paid over the full remaining term ($N_{orig}$) using the Current Balance and Mortgage Rate.
  2. Model the Payoff Scenario: Determine the new, shorter term and the total interest saved by applying the Additional Monthly Payment to the principal. This value is your “Payoff Gain.”
  3. Model the Investment Scenario: Treat the Additional Monthly Payment as a monthly annuity. Use the Investment Rate of Return and the original term ($N_{orig}$) to calculate the Future Value (FV) of the investment portfolio.
  4. Calculate Investment Gain: Subtract the total money invested over the period from the Future Value (FV) to find the net profit, which is your “Investment Gain.”
  5. Compare Gains: Subtract the Payoff Gain from the Investment Gain to find the Net Difference. A positive difference favors investing; a negative difference favors paying off the mortgage.

Frequently Asked Questions (FAQ)

Is the guaranteed return of paying off the mortgage always better than investing?
Not necessarily. While the mortgage interest rate represents a guaranteed, risk-free return, if your investment rate is significantly higher (e.g., 8% vs. a 4% mortgage rate), the power of compounding often makes investing the mathematically superior choice over long periods.

Does this calculation include taxes?
This simple calculator does not include tax effects (like the mortgage interest deduction or capital gains tax). For a real-world decision, you should use the *after-tax* mortgage rate and the *after-tax* investment return rate.

What is a reasonable Investment Rate of Return to use?
A common historical average for a diversified stock portfolio is 8% to 10%. However, you should use a conservative rate that you are comfortable projecting based on your specific investment strategy and risk tolerance (e.g., 6% to 7% for a more balanced portfolio).

What is the biggest benefit of paying off the mortgage early?
The biggest tangible benefit is the interest savings, and the biggest intangible benefit is eliminating monthly debt payments and achieving financial freedom/peace of mind sooner, which provides invaluable protection against future financial shocks.

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