The prepayment vs investing debate is one of personal finance's most common dilemmas. Both build wealth — but through different mechanisms. Extra mortgage payments guarantee a return equal to your interest rate, while investing exposes you to market returns (and risk). This simulator shows you exactly what happens to your net worth under each strategy, year by year.
Mortgage & Investment Parameters
Long-term cap gains (0%, 15%, or 20%)
0% if you don't itemize deductions
Net Worth Comparison Over Time
Year-by-Year Comparison
| Year | Mortgage Bal (Prepay) |
Mortgage Bal (Invest) |
Investment Balance |
Net Worth (Prepay) |
Net Worth (Invest) |
|---|
How to Use the Prepayment vs Investing Simulator
Paying extra on your mortgage and investing the same amount are both powerful wealth-building strategies — they just build wealth differently. Mortgage prepayment gives you a guaranteed, risk-free return equal to your interest rate. Investing offers potentially higher returns but with volatility. The right choice depends on your rate, your timeline, and your risk tolerance.
Step 1: Enter Your Mortgage Details
Enter your current outstanding balance (not original loan amount), remaining term in years, and interest rate. The base monthly payment is calculated automatically. The extra monthly amount slider sets how much additional money you're deciding what to do with — this is the core of the analysis.
Step 2: Set Investment Assumptions
The investment return slider (default 8%) represents your expected annual return on a taxable investment account. The capital gains tax rate reduces your effective return (long-term cap gains are 0%, 15%, or 20% depending on income). If you itemize deductions and claim the mortgage interest deduction, enter your marginal tax rate to get accurate after-tax mortgage cost. Most homeowners should leave this at 0% since the standard deduction now exceeds most people's itemized deductions.
Step 3: Interpret the Net Worth Chart
The chart shows net worth (home equity + investments) for both strategies over time. When the green "Invest" line is above the blue "Prepay" line, investing is winning. When they cross, one strategy overtakes the other. Note the shape: prepayment often wins in early years (because you're reducing a high-interest balance), while investing tends to catch up in the latter half as compounding takes over.
The Key Breakeven Question
The mathematical breakeven is simple: if your after-tax mortgage rate exceeds your after-tax investment return, prepay. If not, invest. With a 6.5% mortgage (no deduction) vs 8% investment return with 15% cap gains tax (6.8% net), investing barely edges out prepayment — but the difference is tiny enough that personal preference (peace of mind from no mortgage) often justifies the prepayment path. Many financial advisors recommend a hybrid: invest in tax-advantaged accounts first (401k to match, then Roth IRA), then prepay mortgage with any remainder.
FAQ
Is the prepayment vs investing simulator free?
Yes, completely free with no signup required. All calculations run locally in your browser — your financial data stays private.
Should I pay off my mortgage early or invest?
It depends on your mortgage rate vs expected investment return. If your mortgage rate is 7% and stocks return 8%, the math slightly favors investing — but only by 1%. Factor in risk: mortgage payoff is a guaranteed 7% return, while stocks can lose 30% in a bad year. Many people choose a hybrid approach: pay off mortgage if it's over 5%, invest aggressively if under 4%.
Does this calculator account for mortgage interest deduction?
Yes — enter your marginal tax rate to activate the deduction effect. The simulator computes after-tax mortgage cost (rate × (1 - marginal rate)) for the interest portion. Note: since 2018, only about 11% of taxpayers itemize, so most homeowners don't get this benefit. If you don't itemize, set your marginal rate to 0%.
What investment return should I use?
The U.S. stock market (S&P 500) has returned about 10% annually on average since 1926, or about 7% after inflation. For a realistic comparison, use 7-8% for an equity-heavy portfolio. For a balanced 60/40 portfolio, 5-6% is more realistic. Bonds alone average 3-4%. The simulator defaults to 8%, which represents a long-term equity-heavy investor.
How is 'net worth' calculated in this simulator?
Net worth equals home equity (home value minus remaining mortgage) plus investment balance. In the prepay scenario, net worth is all equity (accelerated payoff = higher equity, $0 investment). In the invest scenario, you carry the full mortgage longer but also build an investment account. The comparison shows which path produces more total wealth.
What happens to the investment account after the mortgage is paid off?
In the invest scenario, the mortgage is paid off on its normal schedule. After payoff, the same monthly extra payment continues to be invested, compounding further. This is why the invest scenario often wins over very long periods — the compounding period is longer. The prepay scenario also accelerates the payoff, freeing up the full payment for investment from payoff date.
What is a realistic 'extra monthly payment' to model?
Even $200-$500/month extra on a 30-year mortgage can cut 5-7 years off the loan. Try $500/month on a $300,000 mortgage at 6.5% — it saves roughly $80,000 in interest. The question is whether that $80,000 saved is more or less than what $500/month invested for 25 years would grow to at 8% annualized (roughly $475,000 gross, $380,000 after 20% cap gains tax).