Early Mortgage Payoff vs Investing: The Math

The debate between paying off your mortgage early versus investing the extra money generates strong opinions. Let's examine the math and factors that should guide your decision.

The Basic Math

The comparison seems straightforward: if your mortgage rate is 6.5% and the stock market returns 10% annually, you'd earn more by investing. But this oversimplifies crucial factors.

Running the Numbers

Scenario A: Extra Mortgage Payments

$300,000 loan at 6.5%, 30-year term
Extra payment: $500/month toward principal
Payoff time: 17 years, 2 months
Interest saved: $151,000
After payoff, invest $2,396/month for remaining years
Portfolio after 20 years: ~$385,000

Scenario B: Minimum Mortgage, Invest the Difference

Same loan, minimum payments only
Invest $500/month (7% after-tax return)
After 20 years: $260,000 portfolio
Remaining mortgage balance: $147,000
Net position: $113,000

Risk Tolerance Matters

Beyond raw numbers, consider your risk tolerance. Paying down a mortgage feels safe. Investing feels different—your portfolio can drop 20% in a month.

When Investing Clearly Wins

Your mortgage rate is below 4%
You have a long time horizon (20+ years)
You're disciplined enough to actually invest
You can stay invested during downturns

When Mortgage Payoff Clearly Wins

Your mortgage rate is above 6%
You're within 10-15 years of retirement
You'd sleep better without mortgage debt
You panic and sell during market drops

The Hybrid Approach

You don't have to choose exclusively. Many financial advisors recommend:

Maximize employer 401(k) match
Build a 3-6 month emergency fund
Pay off high-interest debt
Max out Roth IRA
Split remaining funds between mortgage and investing