How to use the pay off mortgage or invest calculator
- Enter your mortgage balance, interest rate and years remaining.
- Enter the extra money each month that you would either add to the mortgage or invest.
- Enter an assumed investment return and any tax rate on gains. Try several returns, since nobody knows the future.
- Read which plan ends ahead, the payoff date, the interest saved and the break even return where the plans tie.
Formula
Payment P = standard amortizing payment on the balance
Plan A: pay P + extra on the mortgage until paid off, then invest P + extra each month
Plan B: pay P on the mortgage and invest extra each month
Monthly growth g = (1 + annual return)^(1/12); pot = pot x g + deposit
Compare both pots after the original term, after tax on gains
Both plans spend the same total every month, so the comparison is fair. Deposits are made at month end, and the break even return is found by repeating the comparison until the two plans match.
Worked example
A $250,000 mortgage at 6.5% with 25 years left has a payment of $1,688.02. With $500 extra a month, the loan is paid off in 14 years 11 months and you save $115,667.84 of interest.
After 25 years, plan A has an investment account of about $380,386 from investing the full payment once the loan is gone. Plan B, investing $500 a month at 7%, reaches about $391,522, so investing comes out ahead by $11,135.97. At a 4% return, paying the mortgage down wins.
The core trade
Paying extra on the mortgage earns a guaranteed return equal to the mortgage rate, since every dollar of principal removes interest you would have paid. Investing earns an uncertain return that may be higher or lower. The break even figure shows what return the investment must beat. A higher number means the mortgage payoff is the stronger choice.
What the numbers leave out
Risk is the big one. A guaranteed saving is not the same as an expected return, and the stock market can fall for years. Also consider emergency savings, employer retirement matches, which usually beat both options, and whether you value being debt free. Tax deductions for mortgage interest and the tax on investment gains vary. See the mortgage payoff calculator for a payoff schedule.
Making it your own
Enter your real balance and rate, and test a range of returns and tax rates. For the effect of compounding on the investment side use the compound interest calculator. To see whether a lower rate would change the answer, try the refinance calculator.
Assumptions and limits
- The mortgage rate is fixed and the payment is the standard payment over the years remaining, with no escrow items.
- The investment return is a steady annual rate you enter. Real returns vary from year to year.
- Gains tax is applied once at the end to the growth in the account. Using a tax advantaged account is the same as 0%.
- Mortgage interest deductions, fees and prepayment penalties are not modeled. This is arithmetic, not advice.
Frequently asked questions
Should I pay off my mortgage early or invest?
It depends on your mortgage rate, the return you expect, your tax situation and how much risk you can accept. The break even return in this tool shows the number to compare against.
What return do I need for investing to win?
The break even return shown in the results. If you expect to earn more than that, after tax and after risk, investing comes out ahead.
Does an extra payment shorten the loan or lower the payment?
Extra principal shortens the loan when the payment stays the same. Your lender would have to recast the loan for a lower payment.
Why do both plans spend the same amount?
So the comparison is fair. Plan A puts the extra on the loan and then redirects the freed payment to investments, and plan B invests the extra from the start.