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Pay Off Mortgage vs Invest

Got extra money? Pay down the mortgage or invest?

The mortgage
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Investment assumptions
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Your tax situation (used for the “true” after-tax comparison)

Filing status

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$
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State taxes cap gains as ordinary income?

Most states tax LTCG as ordinary income. Exceptions exist (TX/FL/WA: no state tax; some have a separate cap-gains rate).

With $500/month extra

Pay off

Paying down the 6.5% mortgage beats investing at 7% by $31,863 at year 25. After-tax spread: 0.67% in favor of paydown — and paydown is guaranteed, not expected.

Mortgage rate (after-tax)

6.27%

6.5% × (1 − 3.5% effective deduction value)

Market return (after-tax)

5.60%

7% − 15% LTCG − 5.0% state

Spread

-0.67%

paydown favored

Mortgage paid off (prepay)

Mo 191

15yr 11mo

Net wealth at horizon

$31,863

prepay path ahead

Net wealth over time (portfolio − mortgage balance)
Prepay path Invest path
$-299,099$-167,721$-36,342$95,036$226,415$357,793Yr 0Yr 5Yr 10Yr 15Yr 20Yr 25

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 standard-deduction floor, mortgage interest provides zero benefit.
  • Investment: after-tax = market × (1 − LTCG bracket − NIIT − state). LTCG: 0/15/20% by AGI. NIIT: 3.8% over $200k single / $250k MFJ. State: applied if your state taxes cap gains as ordinary income.

What this still doesn’t model:

  • 401(k) match. Always do that first — it’s a 100% instant return you’ll never beat.
  • 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 HELOC or refi.
  • Sequence-of-returns risk. A bear market early in the horizon hurts the invest path more than the average-return assumption suggests.
  • Step-up basis at death. Heirs get cap-gains forgiveness on inherited investments — meaningful for older borrowers.
  • Rate of interest 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 as the marginal benefit rate throughout.

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