Pay off the mortgage vs. invest
Scenario. A $300,000 balance at 6.76% with $500/month of surplus. Paying it toward principal earns a guaranteed 6.76%; investing it targets a higher but uncertain long-run return.
| Pay extra principal | Invest the surplus | |
|---|---|---|
| Return on the extra $500/mo | 6.76%, guaranteed | ~7% expected, not guaranteed |
| Interest saved by prepaying | $190,280 | — |
| Time cut from the loan | 12 yr 7 mo | — |
| Liquidity of the money | Locked in home equity | Accessible in a brokerage account |
| Tax treatment | No tax on "return" | Taxed on gains unless in a retirement account |
Run “Pay extra principal” → · Run “Invest the surplus” →
Expected value vs. certainty
Prepaying a mortgage is a risk-free, tax-free investment returning exactly your interest rate. A diversified stock portfolio has a higher expected return over long periods but comes with real volatility and no guarantee. When your rate is 3%, the expected-value case for investing is overwhelming. At 6–7%, the gap narrows and certainty starts to look attractive.
Do these first
- Pay off any debt above roughly 7–8% — credit cards, most personal loans. Nothing here competes with that.
- Capture the full employer retirement match. It is an instant 50–100% return.
- Build a cash emergency fund. Money in the house cannot cover a job loss.
- Only then weigh extra mortgage principal against additional investing.
Frequently asked questions
Is it better to pay off my mortgage or invest?
If your mortgage rate is well below expected investment returns and you have an emergency fund and no high-interest debt, investing usually wins on expected value. As the rate rises toward market-return territory, the guaranteed savings from prepaying become more compelling.
Does the mortgage interest deduction change this?
Only slightly, and only if you itemize. Most households take the standard deduction now, so for them the mortgage rate is the full cost with no tax offset.
What if I split the difference?
That is a reasonable choice. Investing the majority and adding a smaller amount to principal keeps most of the expected growth while still cutting years off the loan.
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Terms: Principal , Home equity , Compound interest , Prepayment penalty