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Pay Off Mortgage vs Invest

Got extra money? Pay down the mortgage or invest?

Compare putting extra cash toward your mortgage each month with investing it instead, after taxes. You’ll need your loan balance, rate, and months left, plus a few numbers from your tax return.

  1. Paying extra is a guaranteed return

    Each extra dollar toward the loan erases interest you’d otherwise pay, so it “earns” your mortgage rate with no risk. It also shortens the loan.

  2. Investing is an expected return

    The same dollar invested may grow faster on average, but markets can fall. The money you put toward the loan can’t also be invested, an on either side.

  3. Taxes change both rates

    Mortgage interest can lower your taxes, but only if you itemize instead of taking the . Investment gains are taxed when you sell (). The after-tax rate that’s higher wins on average.
Both choices come after an emergency fund and any employer 401(k) match. How the mortgage interest deduction works.
Your mortgage and extra cash

Today’s loan figures from your mortgage statement, plus the monthly amount you’re deciding what to do with.

$
%
$
Investment assumption

The yearly growth you expect if you invest instead. No other input moves the answer as much.

% / yr
Your tax situation

Used to work out the after-tax rate on each side. Last year’s tax return has most of these numbers.

Filing status

$
%
%
$
$
$

State taxes investment gains as income?

Most states tax long-term gains as ordinary income. Exceptions: Texas and Florida have no state income tax; Washington taxes stock gains only above a large yearly threshold ($278,000 in 2025; real estate is exempt), so choose No there unless your gains top that; a few states use a separate capital gains rate.

With $500 a month extra

Pay off

Paying down the 6.5% mortgage beats investing at 7% by $2,570 after 25 years. After-tax spread: +0.09% in favor of investing. The full-period result differs from this snapshot; see below for why. The paydown return is guaranteed.

Mortgage rate after tax

6.00%

6.5% minus your tax savings (deduction worth 7.7% of interest)

Investment return after tax

6.09%

7% taxed at 20.0% (15% LTCG + 5.0% state), gains taxed at year 25

Difference (spread)

+0.09%

favors investing

Paid off if you prepay

Month 191

15 yr 11 mo from now

Ahead by, at 25 years

$2,570

prepay path ahead

What this means

Every extra dollar you put toward the mortgage effectively earns 6.00% a year, guaranteed, because it erases interest you’d otherwise pay. That’s below your 6.5% rate because you itemize, so part of the interest comes back as a tax deduction. Investing the same money earns about 6.09% a year after tax on average, though markets can fall. Over 25 years, the prepay path ends up $2,570 ahead. The after-tax rates are a starting snapshot: money invested in later months has less time to defer tax on its gains, and your interest deduction shrinks as the loan is paid down, so over the full period paying down comes out ahead.

The rates are close, so the answer depends heavily on the return you assume; a slightly different return could flip it. Paying extra also gives up flexibility: money in your home is hard to get back out without selling or borrowing against it.

Net wealth over time (investments minus what you still owe)
Prepay path Invest path
-$298,974-$158,694-$18,415$121,865$262,144$402,424Yr 0Yr 5Yr 10Yr 15Yr 20Yr 25

Each line is the after-tax value of the investments that path builds, minus the mortgage balance still owed. Both start below zero because the loan is owed and nothing is invested yet.

How the after-tax rates are computed:

  • Mortgage: marginal-value method, benefit = max(itemized − max(standard, itemized−interest), 0) × marginal. If you’re under the , mortgage interest provides zero benefit. Only interest on the first $750k of balance counts (acquisition-debt limit). State and local taxes count only up to the . The loan itself amortizes at its note rate on both paths; the tax savings are a separate cash flow that gets invested as it arrives.
  • Investment: a taxable brokerage account. Assumes a 1.5% dividend yield taxed each year as qualified dividends; the rest of the return is price growth, taxed as a long-term gain () only when you sell at the horizon (shown values assume you sell). Rate = LTCG bracket (0/15/20% by taxable income, estimated as minus your standard or itemized deduction) + (3.8% over $200k single / $250k married filing jointly) + state, if your state taxes cap gains as ordinary income. The after-tax return shown is for money invested today and held to the horizon.

What this still doesn’t model:

  • 401(k) match. Take it first: every matched dollar is an instant return equal to your employer’s match rate (50% to 100% is common), more than paying down a mortgage or investing is likely to earn.
  • Tax-advantaged space. Investing in a Roth IRA or 401(k) avoids the LTCG/NIIT entirely; this calc assumes a taxable brokerage account.
  • Liquidity. Invested money is accessible; paid-off equity requires a or refinance to reach.
  • Sequence-of-returns risk. A bear market early in the horizon hurts the invest path more than the average-return assumption suggests.
  • Step-up in at death. Heirs get cap-gains forgiveness on inherited investments, meaningful for older borrowers.
  • Deduction decay. Mortgage interest declines each year as you amortize, eventually falling under the standard-deduction floor for some borrowers. The calc uses year-1 interest to set the deduction’s value per dollar of interest throughout.

For a precise after-tax mortgage rate alone, see the Mortgage Interest Deduction calculator.

Results are estimates based on your inputs and the assumptions on this page, not quotes or advice. A lender, servicer, or tax advisor will give you different numbers. Disclaimer

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Terms used on this page

The answer turns on two after-tax rates, so most of these terms are about taxes.

Prepaying (extra principal)
Paying more than your required mortgage payment, with the extra going straight to the loan balance. It cuts the interest you’ll pay and ends the loan sooner.
After-tax mortgage rate
Your mortgage rate minus any tax savings from deducting the interest. If you take the standard deduction, it’s your full rate.
After-tax investment return
What your investments are expected to earn each year once taxes on dividends and on gains when you sell are taken out.
Spread
The after-tax investment return minus the after-tax mortgage rate. Positive favors investing; negative favors paying down the loan.
Standard deduction vs. itemizing
You deduct either a flat standard amount or your itemized expenses (mortgage interest, state and local taxes, charity), whichever is larger. Mortgage interest only saves tax when itemizing wins.
SALT cap
The limit on state and local taxes (income plus property tax) you can deduct when itemizing: $40,400 for 2026, phasing down toward $10,000 at higher incomes. More
AGI (adjusted gross income)
Your total income minus certain adjustments like pre-tax retirement contributions. It’s the bottom line on page one of Form 1040.
Long-term capital gains (LTCG)
Profit on investments held more than a year, taxed federally at 0%, 15%, or 20% depending on your income.
NIIT (net investment income tax)
An extra 3.8% federal tax on investment income for higher earners: above $200,000 of income single or $250,000 married filing jointly. More
Opportunity cost
What your money could have earned another way. A dollar sent to the mortgage can’t also be invested, and the reverse.

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