Understanding the Mortgage Payoff vs. Invest Decision
Deciding whether to accelerate mortgage payments or invest 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.
The Math Behind the Decision
This calculator helps you compare two scenarios:
Scenario 1: Paying Extra on Your Mortgage
When you make extra payments on your mortgage, the additional amount goes directly towards reducing your principal balance. This has several benefits:
Reduces Interest Paid: By lowering the principal faster, you pay less interest over the life of the loan.
Shortens Loan Term: Extra payments can significantly reduce the number of years until your mortgage is fully paid off.
Guaranteed Return: The "return" on this strategy is equivalent to your mortgage's interest rate, tax-free. For example, if your mortgage rate is 4.5%, paying an extra dollar is like getting a guaranteed, risk-free 4.5% return.
The calculation for mortgage payoff involves amortizing the loan with the extra payments to determine the new payoff time and total interest saved.
Scenario 2: Investing Extra Funds
Investing your extra money in the stock market, bonds, or other assets offers the potential for higher returns, but it comes with risk.
Potential for Higher Returns: Historically, the stock market has provided average annual returns higher than most mortgage interest rates over the long term.
Flexibility: Investment accounts are generally more liquid than home equity.
Risk: Investment values can fluctuate, and there's no guarantee of returns. You could lose money.
The calculation for the investment scenario uses compound interest formula to project the future value of your investments, considering your expected rate of return and additional contributions.
Key Factors to Consider
Mortgage Interest Rate vs. Expected Investment Return: Generally, if your expected investment return is significantly higher than your mortgage interest rate, investing may be more financially advantageous. However, consider the risk.
Risk Tolerance: Are you comfortable with the volatility of investments, or do you prefer the certainty of paying off debt?
Tax Deductibility: Mortgage interest may be tax-deductible (consult a tax professional). Investment gains are often taxed. This can impact the net return of both strategies.
Emergency Fund: Ensure you have a solid emergency fund before prioritizing either debt payoff or aggressive investing.
Psychological Benefit: For many, being mortgage-free provides significant peace of mind.
Disclaimer: This calculator is for educational and illustrative purposes only. It does not constitute financial advice. Consult with a qualified financial advisor before making any financial decisions.
function calculateMortgageDecision() {
var currentMortgageBalance = parseFloat(document.getElementById("currentMortgageBalance").value);
var remainingMortgageTermYears = parseFloat(document.getElementById("remainingMortgageTerm").value);
var mortgageInterestRate = parseFloat(document.getElementById("mortgageInterestRate").value);
var extraMortgagePayment = parseFloat(document.getElementById("extraMortgagePayment").value);
var investmentRateOfReturn = parseFloat(document.getElementById("investmentRateOfReturn").value);
var investmentTimeHorizonYears = parseFloat(document.getElementById("investmentTimeHorizon").value);
var additionalInvestment = parseFloat(document.getElementById("additionalInvestment").value);
var resultDiv = document.getElementById("result");
var recommendationDiv = document.getElementById("recommendation");
// Clear previous recommendation
if (recommendationDiv) {
recommendationDiv.remove();
}
// Input Validation
if (isNaN(currentMortgageBalance) || currentMortgageBalance <= 0 ||
isNaN(remainingMortgageTermYears) || remainingMortgageTermYears <= 0 ||
isNaN(mortgageInterestRate) || mortgageInterestRate < 0 ||
isNaN(extraMortgagePayment) || extraMortgagePayment < 0 ||
isNaN(investmentRateOfReturn) || investmentRateOfReturn < 0 ||
isNaN(investmentTimeHorizonYears) || investmentTimeHorizonYears <= 0 ||
isNaN(additionalInvestment) || additionalInvestment 0 && mortgageMonthlyRate > 0) {
originalMonthlyPayment = currentMortgageBalance * (mortgageMonthlyRate * Math.pow(1 + mortgageMonthlyRate, remainingMortgageTermMonths)) / (Math.pow(1 + mortgageMonthlyRate, remainingMortgageTermMonths) – 1);
}
var totalMonthlyMortgagePayment = originalMonthlyPayment + extraMortgagePayment;
var mortgageBalance = currentMortgageBalance;
var monthsToPayoff = 0;
var totalInterestPaidMortgage = 0;
var principalPaidMortgage = 0;
// Amortization loop to find payoff time and total interest
if (mortgageMonthlyRate > 0) {
while (mortgageBalance > 0 && monthsToPayoff mortgageBalance) {
principalThisMonth = mortgageBalance;
interestThisMonth = 0; // Assume paid off
totalMonthlyMortgagePayment = principalThisMonth; // Adjust payment for last month
}
if (totalMonthlyMortgagePayment <= interestThisMonth) { // Avoid infinite loop if payment is too low
resultDiv.innerHTML = "Extra mortgage payment is too low to make progress. Mortgage might never be paid off.";
return;
}
mortgageBalance -= principalThisMonth;
totalInterestPaidMortgage += interestThisMonth;
principalPaidMortgage += principalThisMonth;
monthsToPayoff++;
if (mortgageBalance <= 0) {
break;
}
}
} else { // 0% interest rate
monthsToPayoff = Math.ceil(currentMortgageBalance / totalMonthlyMortgagePayment);
totalInterestPaidMortgage = 0;
principalPaidMortgage = currentMortgageBalance;
}
var mortgagePayoffYears = monthsToPayoff / 12;
var originalTermMonths = remainingMortgageTermYears * 12;
var interestSaved = (originalMonthlyPayment * originalTermMonths) – (totalInterestPaidMortgage + currentMortgageBalance) ; // Estimate of interest saved compared to original schedule
// Ensure interest saved is not negative due to calculation nuances
if (interestSaved 0) {
// FV = P * [((1 + r)^n – 1) / r] + PMT * [((1 + r)^n – 1) / r] (where P is initial, PMT is additional)
// Let's assume initial investment is 0 for simplicity, as the calculator focuses on *additional* funds.
// If you want to include current savings, add another input field.
futureValueOfInvestments = additionalInvestment * (((Math.pow(1 + investmentMonthlyRate, investmentTimeHorizonMonths) – 1) / investmentMonthlyRate));
totalInvestmentPrincipal = additionalInvestment * investmentTimeHorizonMonths;
} else { // 0% return
futureValueOfInvestments = additionalInvestment * investmentTimeHorizonMonths;
totalInvestmentPrincipal = futureValueOfInvestments;
}
var totalInvestmentGain = futureValueOfInvestments – totalInvestmentPrincipal;
// — Comparison and Recommendation —
var mortgageRateAsDecimal = mortgageInterestRate / 100;
var investmentReturnAsDecimal = investmentRateOfReturn / 100;
var mortgagePayoffBenefit = (interestSaved / (originalTermrementalPayment * originalTermMonths)) * 100; // A rough metric of savings percentage relative to original payment value.
var investmentPotentialBenefit = totalInvestmentGain; // Direct gain amount
var outputHtml = "";
outputHtml += "
";
outputHtml += "Projected Investment Value: $" + futureValueOfInvestments.toFixed(2) + "";
outputHtml += "Total Investment Gain: $" + totalInvestmentGain.toFixed(2) + "";
outputHtml += "Total Invested: $" + totalInvestmentPrincipal.toFixed(2) + "";
resultDiv.innerHTML = outputHtml;
// Add recommendation
var recommendationHtml = "";
if (investmentPotentialBenefit > interestSaved && investmentRateOfReturn > mortgageInterestRate) {
recommendationHtml = "Investing your extra funds could potentially yield a higher financial return compared to paying off your mortgage early, assuming your expected investment returns are realized.";
} else if (interestSaved > investmentPotentialBenefit && mortgageInterestRate > investmentRateOfReturn) {
recommendationHtml = "Paying off your mortgage early offers a guaranteed, risk-free return equivalent to your mortgage interest rate, potentially providing greater financial security and peace of mind.";
} else if (mortgageInterestRate > investmentRateOfReturn) {
recommendationHtml = "Given the higher guaranteed return from your mortgage rate, prioritizing extra mortgage payments may be more financially prudent.";
} else if (investmentRateOfReturn > mortgageInterestRate) {
recommendationHtml = "The potential for higher returns through investing, despite the risks, might be more attractive than the guaranteed, albeit lower, return from paying down your mortgage.";
} else {
recommendationHtml = "The financial outcomes are projected to be very similar. Consider your personal preferences for risk, security, and the psychological benefit of being debt-free.";
}
// Add a disclaimer to the recommendation
recommendationHtml += " Remember to factor in your personal risk tolerance and tax implications.";
var newRecommendationDiv = document.createElement('div');
newRecommendationDiv.id = 'recommendation';
newRecommendationDiv.textContent = recommendationHtml;
resultDiv.parentNode.insertBefore(newRecommendationDiv, resultDiv.nextSibling);
}