Extra Mortgage Payments vs Investing: The Return That Breaks Even

Two households with the same mortgage and the same monthly budget can treat a spare $100 differently. One adds it to the mortgage payment until the loan is gone, then invests the whole freed-up payment for the years that remain. The other pays the scheduled amount and invests the $100 every month. Both spend the same each month, and both own the house outright by the end of the original term. The comparison that is left is the investment account each one holds at that point, after tax on its gains.

That framing turns a question usually argued in terms of temperament into a single number: the annual investment return at which the two accounts come out equal. Below it, prepaying ends ahead; above it, investing does. The figures below come from the extra principal vs investing calculator, starting from its defaults: a $400,000 balance at 6.75% with 30 years remaining, $100 a month extra, a 7% expected return and a 15% tax on investment gains.

The default case

Adding $100 a month saves $68,285 of interest over the life of the loan. Investing the $100 instead builds an account worth $104,803 after tax by the end of the term. Once the prepay household has finished the loan and invested its freed-up payments, it ends $9,620 ahead. The investment return at which the two would tie is 7.54% a year, almost eight-tenths of a point above the mortgage rate.

Why the breakeven sits above the mortgage rate

Two separate effects lift the breakeven above 6.75%. The first is compounding. A mortgage rate is an annual rate charged monthly, so 6.75% works out to 6.96% a year once each month’s interest is counted on the last. An investment return quoted as 7% a year is already an annual figure, so the like-for-like comparison is 6.96%, not 6.75%. With no tax on gains, that is exactly where the breakeven lands.

The second is tax. Interest that is never charged is not income, so the return on a prepayment arrives untaxed. Gains in a taxable account are taxed when they are realized. At a 15% rate on gains the breakeven rises to 7.54%; at 20% it rises to 7.76%.

The 0% row is the case for money that would otherwise go into a tax-free account. There the comparison is almost a straight race between the mortgage’s compounded rate and the investment return.

The mortgage rate moves the answer most

Holding everything else at the defaults, the mortgage rate shifts the breakeven almost point for point. The interest saved by prepaying rises with the rate, and the investment return needed to keep up rises with it.

A loan taken out when rates were near 3% needs an investment return in the high 3s to beat it after tax. A loan at 7.5% needs one above 8.3%. The same $100 a month leads to opposite results at the two ends of the table.

The expected return is the input nobody knows

At 6.75%, the outcome turns on a return the calculator has to assume. Between 6% and 9%, each point of return moves the result by $15,073 to $23,423 by the end of the term.

The two sides of the comparison are not equally certain. The prepayment’s return is fixed by the loan contract. The investment’s return is an average over decades that will include losing years, and the calculator treats it as if it were earned smoothly. A breakeven of 7.54% is the average return needed, not a return any single year is likely to produce.

The size of the extra payment barely matters

Raising the extra payment scales the dollar results but leaves the breakeven almost unchanged, because the comparison is between two rates.

Larger extra payments pay the loan off sooner, which leaves more years to invest the freed-up payment. That nudges the breakeven slightly lower, but the movement is a few hundredths of a point.

What the comparison leaves out

• The mortgage interest deduction. For a household that itemizes, deductible interest costs less than the stated rate, which lowers the breakeven. Most households take the standard deduction, and for them the stated rate is the cost.
• Access to the money. Prepaid principal can be reached again only by selling, refinancing or borrowing against the house. An investment account can be sold at any time, at whatever price the market offers.
• Employer matching. Money that would earn a 401(k) match is a different comparison; the match is an immediate return the mortgage cannot offer.
• Mortgage insurance. A prepayment that brings forward the date private mortgage insurance can be removed earns that premium too, which the calculator does not count.
• Risk. The table above shows how wide the range of outcomes is for returns a few points either side of the assumption.

Within those limits, the comparison reduces to one question: whether the return expected on the money, after tax and over the life of the loan, is above or below the mortgage’s compounded rate grossed up for that tax. The calculator shows that number for any balance, rate and payment.

Assumptions

Figures computed on October 3, 2026 with the extra principal vs investing calculator: a fixed-rate loan with monthly payments over the remaining term; annual investment returns converted to an equivalent monthly rate; tax on investment gains applied once, at the end of the term; both households spend the same each month and own the house at the end. The balance, rates, returns and payment amounts are illustrative. Amounts are rounded to the dollar.