Mortgage Payoff vs. Investing Calculator
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Mortgage Payoff vs. Investing Calculator
Mortgage Payoff vs. Investing: Making the Right Financial Choice
Deciding whether to aggressively pay down your mortgage or invest the extra funds is a classic financial dilemma. There's no one-size-fits-all answer, as the optimal strategy depends on your personal financial situation, risk tolerance, and market conditions. This calculator helps you compare the outcomes of both strategies over a chosen time horizon.
Understanding the Calculations
The calculator compares two scenarios:
- Accelerated Mortgage Payoff: This scenario assumes you take the "extra monthly payment" amount and add it to your regular mortgage payment, directing it specifically towards the principal. We calculate the total interest saved and the time reduced to pay off your mortgage.
- Investing the Difference: This scenario assumes you continue making your regular mortgage payment and instead invest the "extra monthly payment" and "extra investment contribution" amounts into a diversified investment portfolio. We estimate the future value of your investments based on your expected rate of return.
Mortgage Payoff Calculation Logic:
The mortgage payoff calculation uses an amortization schedule. For each month, it determines how much of your payment goes to interest and how much to principal. When an extra payment is made, it's applied directly to the principal, reducing the balance faster and subsequently lowering future interest accruals. The formula for monthly interest is `(Remaining Balance * Annual Interest Rate) / 12`, and the principal portion is `Monthly Payment – Interest Paid`. The extra payment directly reduces the principal.
The calculator simulates this month by month until the mortgage balance reaches zero, tracking the total interest paid and the original payoff timeline. The interest saved is the difference between the total interest you would have paid over the loan's life without extra payments and the total interest paid with the extra payments.
Investment Calculation Logic:
The investment calculation uses the future value of an ordinary annuity formula, compounded monthly, with additional monthly contributions. The formula for the future value (FV) is:
FV = P/i + [ (P/i) * ((1 + i)^n - 1) ] + (C * ((1 + i)^n - 1)) / i
Where:
P = Regular Payment (in this case, assumes regular mortgage payment is made, not invested)i = Monthly interest rate (Annual Rate / 12)n = Total number of payments (Loan Term in Years * 12)C = Additional Monthly Contribution (the sum of "Extra Monthly Payment Towards Principal" and "Extra Monthly Investment Contribution" for comparison purposes, effectively)
The calculator simplifies this by calculating the future value of the monthly investment contributions (both the "extra" amount designated for investing and the equivalent of the extra mortgage payment, for a fair comparison) over the specified `investmentTimeHorizon` at the `investmentRate`.
Key Considerations:
- Guaranteed Return vs. Market Risk: Paying down your mortgage offers a guaranteed return equal to your mortgage interest rate – risk-free. Investing, on the other hand, offers potentially higher returns but comes with market risk.
- Interest Rate Comparison: If your expected investment return is consistently higher than your mortgage interest rate, investing may be more financially advantageous over the long term. However, if the rates are close, the guaranteed return of mortgage payoff might be more appealing.
- Liquidity: Money invested is generally more liquid than equity built up in your home. However, paying down your mortgage frees up cash flow faster as you eliminate a monthly payment sooner.
- Psychological Benefits: For some, the peace of mind that comes with being mortgage-free outweighs potential investment gains.
- Tax Deductions: Mortgage interest is often tax-deductible. This calculator does not account for tax implications, which can affect the true cost of your mortgage and the net return on your investments. Consult a tax professional for advice.
Use this calculator as a tool to visualize potential outcomes. Consider your personal comfort level with risk and your long-term financial goals when making your decision.
function calculatePayoffVsInvesting() {
var mortgageBalance = parseFloat(document.getElementById("mortgageBalance").value);
var mortgageInterestRate = parseFloat(document.getElementById("mortgageInterestRate").value) / 100;
var extraMortgagePayment = parseFloat(document.getElementById("extraMortgagePayment").value);
var investmentRate = parseFloat(document.getElementById("investmentRate").value) / 100;
var investmentTimeHorizon = parseInt(document.getElementById("investmentTimeHorizon").value);
var extraInvestmentContribution = parseFloat(document.getElementById("extraInvestmentContribution").value);
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
resultDiv.style.display = "none";
// Input validation
if (isNaN(mortgageBalance) || mortgageBalance <= 0 ||
isNaN(mortgageInterestRate) || mortgageInterestRate <= 0 ||
isNaN(extraMortgagePayment) || extraMortgagePayment < 0 ||
isNaN(investmentRate) || investmentRate <= 0 ||
isNaN(investmentTimeHorizon) || investmentTimeHorizon <= 0 ||
isNaN(extraInvestmentContribution) || extraInvestmentContribution 0) {
var interestForMonth = tempBalance * monthlyMortgageInterestRate;
tempInterestPaid += interestForMonth;
var principalPayment = tempBalance + interestForMonth; // Hypothetical full payment to clear loan
// How much of the extra payment goes to principal?
// If we assume a base payment exists, the extra payment adds to principal.
// If we interpret 'extraMortgagePayment' as the *total* additional amount paid monthly towards principal beyond the minimum:
var principalReduction = extraMortgagePayment; // Direct application of the extra amount
// The actual monthly payment needs to cover interest first, then principal.
// Without knowing the original required payment, this simulation is approximate.
// Let's refine: Assume extraMortgagePayment is *added* to the minimum required payment.
// We need a minimum payment to calculate this. A common scenario is that the user is ALREADY making extra payments.
// So, we'll assume the *total* amount available for principal reduction each month is `extraMortgagePayment` effectively.
// Let's use a standard amortization approach for clarity:
// Assume the user is paying the minimum required payment PLUS the extraMortgagePayment.
// We need to calculate the minimum required payment first. This requires original loan term.
// Since original loan term is NOT given, we cannot calculate the minimum required payment.
// Let's RE-INTERPRET: The user provides "extraMortgagePayment" meaning this is the *additional* amount they would pay *on top of* their standard minimum mortgage payment.
// To calculate interest saved, we need to know how fast the loan is paid off.
// Let's simulate payoff using `mortgageBalance`, `mortgageInterestRate`, and `extraMortgagePayment` AS the total *additional* principal paid monthly.
// This is still an approximation without the base payment.
// A BETTER APPROACH: Calculate how many months it takes to pay off `mortgageBalance` with an *additional* `extraMortgagePayment` applied to principal *each month*.
// Resetting simulation logic for clarity:
// Scenario 1: Pay down mortgage faster.
// We assume the `extraMortgagePayment` is applied directly to principal each month, *in addition* to whatever the minimum payment would be.
// The interest saved comes from reducing the principal balance faster.
// We need to simulate month-by-month.
var currentLoanBalance = mortgageBalance;
var totalInterestPaidAccelerated = 0;
var monthsAccelerated = 0;
var monthlyRate = mortgageInterestRate / 12;
while (currentLoanBalance > 0.01) { // Continue until balance is negligible
var interestThisMonth = currentLoanBalance * monthlyRate;
totalInterestPaidAccelerated += interestThisMonth;
var principalPaymentThisMonth = extraMortgagePayment; // The extra payment goes entirely to principal reduction
// If the balance plus interest is less than the extra payment, we pay it off.
if (currentLoanBalance + interestThisMonth 10000) { // Safety break for impossible scenarios
console.error("Mortgage payoff simulation exceeded maximum iterations.");
totalInterestPaidAccelerated = Infinity; // Indicate an issue
break;
}
}
// If totalInterestPaidAccelerated is Infinity, skip this part.
var interestSaved = Infinity; // Placeholder
if (totalInterestPaidAccelerated !== Infinity) {
// To calculate interest saved, we need the total interest paid *without* extra payments.
// This requires the original loan term. Let's assume a 30-year term (360 months) for comparison baseline.
// This is a significant assumption.
var originalLoanTermMonths = 360; // Assumed
var baseMonthlyPayment = calculateMonthlyPayment(mortgageBalance, mortgageInterestRate, originalLoanTermMonths);
var totalInterestWithoutExtra = (baseMonthlyPayment * originalLoanTermMonths) – mortgageBalance;
interestSaved = totalInterestWithoutExtra – totalInterestPaidAccelerated;
}
// — Investment Calculation —
var monthlyInvestmentRate = investmentRate / 12;
var totalInvestmentMonths = investmentTimeHorizon * 12;
var futureValueInvestments = 0;
// Combining both "extra" amounts for a fair comparison:
// If the user chose to pay extra on mortgage, they have that money available.
// If they chose to invest, they have that money available.
// For a direct comparison, we assume the SAME total amount is being deployed each month.
// Let's call this "Total Extra Funds Available Per Month".
var totalExtraFundsAvailablePerMonth = extraMortgagePayment + extraInvestmentContribution;
var currentInvestmentBalance = 0;
for (var i = 0; i < totalInvestmentMonths; i++) {
currentInvestmentBalance += totalExtraFundsAvailablePerMonth; // Add monthly contribution
currentInvestmentBalance *= (1 + monthlyInvestmentRate); // Add interest
}
futureValueInvestments = currentInvestmentBalance;
// — Display Results —
var resultHTML = "
Comparison Results
";
// Mortgage Payoff Summary
if (totalInterestPaidAccelerated !== Infinity && interestSaved !== Infinity) {
resultHTML += "
Accelerated Mortgage Payoff:";
resultHTML += "Estimated Interest Saved:
$" + interestSaved.toFixed(2) + "";
resultHTML += "Estimated Months Saved:
" + (monthsAccelerated) + " months (approx. " + Math.floor(monthsAccelerated/12) + " years and " + (monthsAccelerated % 12) + " months)";
resultHTML += "Estimated Mortgage Paid Off in:
" + monthsAccelerated + " months";
} else {
resultHTML += "
Accelerated Mortgage Payoff: Could not calculate due to missing original loan term or simulation error.";
}
// Investment Summary
resultHTML += "
";
resultHTML += "
Investing the Difference:";
resultHTML += "Total Extra Funds Invested Monthly:
$" + totalExtraFundsAvailablePerMonth.toFixed(2) + "";
resultHTML += "Estimated Investment Value after " + investmentTimeHorizon + " years:
$" + futureValueInvestments.toFixed(2) + "";
resultHTML += "Estimated Net Gain from Investing (over extra mortgage payment):
$" + (futureValueInvestments – (totalExtraFundsAvailablePerMonth * totalInvestmentMonths)).toFixed(2) + ""; // Gain is future value minus total contributions
// Comparison Statement
resultHTML += "
";
if (interestSaved !== Infinity && futureValueInvestments > (totalExtraFundsAvailablePerMonth * totalInvestmentMonths)) {
if (futureValueInvestments > (mortgageBalance + totalInterestPaidAccelerated)) { // Rough comparison: Is investment value greater than total mortgage cost?
resultHTML += "
Verdict: Investing appears to yield a potentially higher financial return over " + investmentTimeHorizon + " years based on your inputs.";
} else {
resultHTML += "
Verdict: The financial outcomes are comparable. Consider non-financial factors like peace of mind from being debt-free.";
}
} else if (interestSaved !== Infinity) {
resultHTML += "
Verdict: Paying down your mortgage faster offers a guaranteed return and significant interest savings. Consider this if you are risk-averse.";
} else {
resultHTML += "
Verdict: Unable to provide a definitive comparison without more information (e.g., original loan term).";
}
resultDiv.innerHTML = resultHTML;
resultDiv.style.display = "block";
}
// Helper function to calculate monthly mortgage payment (used for estimating total interest without extra payments)
function calculateMonthlyPayment(principal, annualRate, termMonths) {
var monthlyRate = annualRate / 12;
if (monthlyRate === 0) return principal / termMonths; // Handle 0% interest rate
var payment = (principal * monthlyRate) / (1 – Math.pow(1 + monthlyRate, -termMonths));
return payment;
}