Pay the mortgage off early or invest the difference

The guaranteed side

An extra $500 a month against $310,000 at 5.9% shortens the remaining term from 24 years to roughly 17 years and 4 months and saves approximately $104,000 in interest. That saving is certain, requires no market view, and is not taxed.

The return is exactly 5.9%, no more. A common error is to compare the headline interest saved with an investment balance — the interest figure is spread across two decades and must be discounted before it is comparable.

The invested side

The same $500 a month invested at 7% nominal for 24 years grows to roughly $392,000, of which about $248,000 is gain. After 15% long-term capital gains tax the net is closer to $355,000, and the after-tax compound rate lands near 6.2% — a thin margin over the certain 5.9%.

That margin is the entire payment for accepting sequence risk, drawdowns and the possibility of needing the money during a bad market. At mortgage rates near or above 6%, the arithmetic advantage of investing largely disappears once tax is included.

What changes the answer

Three factors dominate. First, tax-advantaged space: an employer match or unused tax-deferred contribution room raises the effective investment return well above the mortgage rate and should almost always come first. Second, the standard deduction — if you do not itemise, your mortgage interest carries no tax offset and the payoff case strengthens. Third, liquidity: home equity is not spendable without a sale or a new loan.

• • Capture any employer match before extra principal — nothing else returns 50–100% instantly.
• • If you itemise, reduce the mortgage rate by your marginal rate to get the true hurdle.
• • Keep six months of expenses liquid before accelerating a loan.
• • Confirm your servicer applies extra funds to principal, not to the next payment.

The middle path most people should take

Splitting the surplus is not a compromise for the indecisive — it is a defensible hedge when the two returns are within a percentage point of each other. Directing part of the money to principal shortens the term and lowers required future cash flow, while the invested share preserves liquidity and upside.

Whichever way you split, re-run the numbers whenever your rate, tax situation or expected return changes materially. This is a decision that should be revisited, not made once.

Run it yourself

Each link opens the calculator pre-filled with this scenario's numbers.

• Early payoff calculator
• Overpayment calculator
• Future value calculator

Common questions

Does paying extra lower my monthly payment?

No — it shortens the term. To lower the payment you need a recast, which re-amortises the reduced balance over the same remaining term for a small fee.

Should I pay off a 3% mortgage early?

Rarely. At 3%, low-risk instruments alone can exceed the mortgage rate after tax, so the guaranteed return is unattractive relative to the liquidity given up.

Other scenarios

• First-time buyer putting 5% down
• Refinancing after rates fall
• Buying a first rental property

Unfamiliar with a term used here? See the mortgage glossary.