● Money & small business
Pay off the mortgage early or invest? $500 a month over 30 years, worked out
Extra mortgage payments earn a guaranteed return equal to your mortgage rate: every dollar of principal you pay stops costing interest. Investing the same money might earn more, or less. To compare them fairly, both people below spend exactly the same each month for 30 years: the regular payment plus $500.
- Prepay: $500 extra goes to the mortgage every month. Once it's paid off, the whole amount (payment + $500) is invested every month until year 30.
- Invest: the regular payment for 30 years, and $500 a month invested from day one.
After 30 years both homes are paid off, so the only difference is the investment account. To see what extra payments do to your own loan, use the mortgage extra payment calculator.
$300,000 at 6.5%: investment account after 30 years
The regular payment is $1,896.20. With $500 extra, the loan is paid off at payment 210 (17.5 years), and $2,396.20 a month is invested for the last 150 months.
| Investment return per year | Prepay, then invest | Invest from the start | Difference |
|---|---|---|---|
| 4% | $463,664 | $342,635 | prepaying +$121,029 |
| 5% | $494,769 | $407,688 | prepaying +$87,081 |
| 6% | $528,246 | $487,256 | prepaying +$40,990 |
| 6.5% | $545,930 | $533,513 | prepaying +$12,417 |
| 7% | $564,276 | $584,726 | investing +$20,450 |
| 8% | $603,053 | $704,275 | investing +$101,222 |
| 10% | $689,697 | $1,031,422 | investing +$341,725 |
The break-even return is the mortgage rate compounded monthly: 6.5% charged monthly is 6.697% a year. At exactly that return, both accounts end within $4 of each other (a check on the model). A 6.5% annual return is just below it, which is why prepaying still wins by $12,417 in that row.
At other mortgage rates
Difference after 30 years (investing minus prepaying), $500 a month:
| Return per year | 5% mortgage (paid off at 216) | 6.5% mortgage (210) | 7.5% mortgage (206) |
|---|---|---|---|
| 4% | prepaying +$45,588 | prepaying +$121,029 | prepaying +$179,265 |
| 5% | prepaying +$5,430 | prepaying +$87,081 | prepaying +$150,412 |
| 6% | investing +$47,436 | prepaying +$40,990 | prepaying +$109,906 |
| 7% | investing +$116,266 | investing +$20,450 | prepaying +$54,588 |
| 8% | investing +$205,098 | investing +$101,222 | investing +$19,474 |
| 10% | investing +$463,970 | investing +$341,725 | investing +$244,573 |
Break-even returns: 5.116% a year for a 5% mortgage, 6.697% for 6.5%, and 7.763% for 7.5%.
What the tables leave out
- Risk. The mortgage "return" is certain; investment returns aren't, and the order of good and bad years matters. A steady 7% here is an assumption, not a forecast.
- Taxes. Investment gains may be taxed (or sheltered in a 401(k) or IRA), and mortgage interest may be deductible if you itemize. Both shift the break-even.
- Access to the money. Invested money can be sold in an emergency; money paid into the house can only be reached by selling or borrowing against it.
- Other debts and matches first. An employer 401(k) match or a credit card balance usually beats both options.
The mortgage is amortized month by month with interest rounded to the cent (the same method as our tested mortgage spreadsheet), and the investment account grows monthly at the annual return's monthly equivalent. Not financial advice. Related: what extra mortgage payments save and 15 vs 30-year mortgage.