Educational estimate, not advice. Figures are illustrative; consult a professional for your situation.
What this calculator does
This calculator compares two uses of the same extra monthly amount over a mortgage’s remaining term: paying it toward principal, or investing it. It reports the interest prepaying saves and how much sooner the loan ends, the after-tax investment balance each path holds at the end of the term, the year in which the invested account could pay off the remaining loan, and the return at which the two paths come out equal.
How the math works
- Prepay path. The regular payment plus the extra goes to the loan until it is paid off. From then on, the whole former payment plus the extra is invested each month.
- Invest path. The regular payment runs for the full term, and the extra is invested each month.
- Equal spending. Both paths spend the same each month and own the house outright at the end of the term, so the comparison is between the two investment accounts.
- Returns and tax. The annual return is applied as an equivalent monthly rate. Tax on gains is charged once, at the end, at the rate selected; dividends taxed along the way are not modelled.
- Breakeven return is found by searching for the return that makes the two after-tax accounts equal.
Worked example
The defaults describe a $400,000 balance at 6.75% with 30 years left, so the payment is $2,594.39, and $100 a month extra, with a 7% return and 15% tax on gains.
- Prepaying retires the loan in month 322, 3.2 years early, and saves $68,285 of interest. Investing $2,694.39 a month for the last 38 months leaves $114,423 after tax.
- Investing $100 a month for 30 years leaves $104,803 after tax; the account could pay off the remaining balance in year 28.
- Result: prepaying ends $9,620 ahead. Investing comes out ahead only at returns above 7.54%.
How to read the result
The breakeven return is the figure to judge against. Prepaying earns the mortgage rate with certainty; investing earns an uncertain return and pays tax on it, so the investment return has to clear a bar above the mortgage rate. The headline difference assumes the return entered is earned every year; actual returns vary, and the order of good and bad years matters to the invested path but not to the prepaid one.
The mortgage rate moves the result most. With a $500,000 loan at 3.25% and $300 a month extra, the breakeven return falls to 3.68% and investing ends $117,646 ahead at a 7% return. Liquidity differs too: money paid into the house can be reached only by selling or borrowing, while the invested account can be drawn on along the way.
Sources
- CFPB, How does paying down a mortgage work? — how payments split between interest and principal.
- IRS Publication 936, Home Mortgage Interest Deduction — when mortgage interest is deductible, which this calculator does not model.
- IRS, Topic no. 409, Capital gains and losses — tax rates on long-term gains.
Sources checked October 2026. The return is an input; the calculator uses no market data.
Common mistakes
- Comparing the mortgage rate with a pre-tax return. Interest saved is not taxed; investment gains are, so the comparison has to be after tax, which raises the bar for investing.
- Assuming a steady return. The calculation applies the same return every year; a few poor years can leave the invested path short of the breakeven even when the long-run average is above it.
- Forgetting what happens after payoff. Comparing interest saved with investment growth alone ignores the payment freed up when the loan ends early; this calculator invests it.
- Ignoring liquidity. Extra principal cannot be withdrawn without selling or borrowing against the home, while an investment account can be used in an emergency.
Frequently Asked Questions
Is paying extra on a mortgage the same as earning the mortgage rate?
Close to it. Each extra dollar of principal avoids interest at the mortgage rate for the rest of the loan, a return that is certain and untaxed. Investing has to beat that after tax to come out ahead, which is why the breakeven return at the defaults, 7.54%, is above the 6.75% mortgage rate.
What does the breakeven return mean?
It is the annual investment return at which both paths end with the same after-tax account. Above it, investing the extra ends ahead; below it, prepaying does. It is computed from the inputs, not from market history.
Why does the prepaying path invest at all?
To keep spending equal. Once the extra payments retire the loan early, the full former payment is free each month; investing it from then on makes the two paths comparable on the same monthly budget.
Does this include the mortgage interest deduction?
No. Interest is deductible only for borrowers who itemize, under the limits in IRS Publication 936; including it would lower the effective mortgage rate and the breakeven return.