Expert Reviewed by: David Chen, CFA | Financial Strategy Specialist
Deciding between paying off your mortgage early or investing your extra capital can significantly impact your long-term net worth. Use this mortgage payoff vs investment calculator to compare the guaranteed return of debt reduction against the potential gains of the stock market.
Mortgage Payoff vs Investment Calculator
Financial Recommendation:
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Mortgage Payoff vs Investment Formula
Net Investment Gain: $FV = P \times \frac{(1 + r)^n – 1}{r}$
Interest Saved: Total Interest (Original) – Total Interest (Accelerated)
Comparison: If $FV > \text{Interest Saved} + \text{Remaining Balance}$, Investing is mathematically superior.
Source: Investopedia – Pay Down Mortgage or Invest?
Variables Explained:
- Current Balance: The remaining principal on your mortgage loan.
- Interest Rate: Your annual mortgage interest rate (fixed).
- Remaining Term: How many years you have left until the loan is paid off.
- Monthly Extra: The additional amount you plan to contribute either to the loan or an investment account.
- Investment Return: The expected annual percentage yield (APY) of your investment portfolio.
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What is Mortgage Payoff vs Investment?
This comparison determines the “opportunity cost” of your money. Every dollar used to pay down a mortgage with a 4% interest rate is effectively a guaranteed 4% return on investment. However, if that same dollar could earn 7% in a diversified index fund, you might be missing out on a 3% net gain by choosing debt over equity.
While the math often favors investing when market returns exceed loan rates, many homeowners prioritize the psychological “peace of mind” that comes with being debt-free. This tool provides the raw mathematical data to inform that emotional decision.
How to Calculate (Example)
- Input your remaining balance (e.g., $200,000) and current rate (e.g., 3%).
- Enter your monthly extra payment (e.g., $500).
- Set your expected market return (e.g., 8%).
- The calculator simulates your mortgage timeline with extra payments vs. growing a separate investment account with that $500/month.
- Review the “Net Worth Benefit” to see which path yields more capital at the end of the original mortgage term.
Frequently Asked Questions (FAQ)
Is paying off my mortgage early tax-advantaged? Generally, no. Paying off debt uses after-tax dollars, and you may lose the mortgage interest deduction if you itemize. Investing in a 401(k) or IRA might offer better tax benefits.
What is the “Risk-Free” rate? Your mortgage rate is a “guaranteed” return. Market returns are projections and involve risk. If your mortgage rate is high (e.g., 7%+), paying it off is usually safer than investing.
Should I have an emergency fund first? Absolutely. Never put extra money into a mortgage or the market until you have 3-6 months of expenses saved in a liquid account.
What if I plan to move in 5 years? If you move soon, the long-term compounding of investments may not fully realize, but paying down the mortgage increases your home equity for the next purchase.