Pay Off Your Mortgage or Invest? A 6.5% Example
By the Budget-Time editorial team · Published · Updated (added net-position and 30-year comparisons, assumptions, and sources; tightened tax and risk wording)
Direct answer: under the assumptions below, extra payments on a 6.5% mortgage avoid future interest at approximately 6.5%, predictably. Investing the same cash historically returned more on average, but with real variance, taxes, and sequence risk. At a 6.5% mortgage rate the two paths are genuinely competitive; at low mortgage rates investing is heavily favored on expected value, and at high rates prepaying is defensible pure math.
The setup
- Prepay: pay $2,712.24/month toward the mortgage.
- Invest: pay the scheduled $2,212.24 and invest $500/month in a low-cost S&P 500 index fund.
Path 1: prepay the mortgage
With $500/month extra, the loan is paid off at month 223 (about 18 years 7 months) instead of 360. Total interest drops from $446,405.71 to $252,803.19, avoiding $193,602.52 of interest. An extra principal payment avoids future interest at approximately the loan's rate. The benefit is predictable, but it is not a liquid investment: the money comes back out only by borrowing or selling, and the after-tax benefit can differ if you itemize and deduct mortgage interest (see the tax note below).
Path 2: invest the $500
The S&P 500's long-run total return (dividends reinvested, nominal, before fees and taxes) has averaged roughly 10% per year over long historical windows; results vary widely by start date. Value of $500/month after the same 223 months at several assumed returns:
| Assumed annual return | Investment value at month 223 |
|---|---|
| 6% | $204,111 |
| 6.5% | $215,595 |
| 8% | $255,042 |
| 10% | $321,831 |
The apples-to-apples comparison
Comparing the investment account against the prepay path is incomplete, because at month 223 the invest path still owes money on the house. The scheduled mortgage's remaining balance at month 223 is $213,569. The fair same-date comparison is investment value minus remaining mortgage balance, versus the prepay path's position of exactly $0 debt and $0 portfolio:
| Assumed return | Investments | Remaining mortgage | Net position vs. prepay path |
|---|---|---|---|
| 6% | $204,111 | $213,569 | Prepaying ahead by ≈ $9,459 |
| 6.5% | $215,595 | $213,569 | Investing ahead by ≈ $2,026 |
| 8% | $255,042 | $213,569 | Investing ahead by ≈ $41,473 |
| 10% | $321,831 | $213,569 | Investing ahead by ≈ $108,262 |
This makes the breakeven visible: investing pulls ahead only when the return exceeds the mortgage rate. At exactly 6.5% the two paths nearly tie, and the small remaining gap reflects timing details.
The full 30-year, same-cash-flow comparison
To carry both paths to year 30 with identical cash out of pocket: the prepay path, once debt-free at month 223, invests its entire $2,712.24/month for the remaining 137 months; the invest path pays the mortgage on schedule and invests $500/month for all 360 months. Ending investment balances (the invest path's mortgage is also fully paid at month 360):
| Assumed return | Prepay, then invest freed payment | Invest $500 throughout | Outcome |
|---|---|---|---|
| 6% | $531,810 | $502,258 | Prepay ahead by ≈ $29,552 |
| 6.5% | $548,843 | $553,089 | Invest ahead by ≈ $4,247 |
| 8% | $604,181 | $745,180 | Invest ahead by ≈ $140,999 |
| 10% | $689,083 | $1,130,244 | Invest ahead by ≈ $441,161 |
What the smooth-return tables hide
- Sequence risk. Real returns arrive unevenly. The decade from 2000 through 2009 delivered roughly zero total return for the S&P 500, while the mortgage rate never has a bad decade. An average of 8% can contain outcomes well above and below the table.
- Taxes. Gains in a taxable account owe capital gains tax, which shaves the investing edge. Mortgage interest may be deductible only when you itemize and meet the requirements in IRS Publication 936; many households take the standard deduction instead, but it depends on the household and tax year. If the $500 can instead go into a workplace retirement plan with an employer match, capturing an available match is often a high priority, subject to the plan's formula and vesting rules.
- Liquidity. Publicly traded funds are generally marketable quickly, though prices can be down when you need the money, trades take time to settle, and retirement accounts can have withdrawal restrictions or taxes. Home equity is accessible only by borrowing or selling. A thin emergency fund raises the value of the flexible option.
- Temperament. A paid-off house means no monthly mortgage payment and a guaranteed outcome. Some people place real value on that certainty even when the expected-value math slightly favors investing. That is a preference, not an error.
A sensible default order
- Capture any available employer retirement match (subject to plan rules and vesting).
- Pay off high-APR debt; see snowball vs. avalanche.
- Fund an emergency fund sized to your income stability.
- Then decide by rate and temperament: at mortgage rates near 7% or above, prepaying is defensible pure math; near 4% or below, investing is heavily favored on expected value; in between, splitting the extra cash captures part of both, and either choice is reasonable.
Run it with your own numbers
Your rate, balance, and timeline will differ from this example. Budget-Time pulls your mortgage balance and investment holdings into one Google Sheet daily, so you can rebuild these tables with your actual numbers using ordinary spreadsheet formulas, in a file you keep.
Sources and methodology
- Payment formula: P × r ÷ (1 − (1 + r)−n) with r = 0.065 ÷ 12, n = 360. Future value: C × ((1 + r)n − 1) ÷ r, end-of-month contributions. All figures independently recomputed by simulation; tables rounded to the nearest dollar.
- IRS Publication 936: Home Mortgage Interest Deduction
- S&P Dow Jones Indices: S&P 500 (historical index data)
- Investor.gov: past performance does not guarantee future results
Related guides
- Debt Snowball vs. Avalanche: Real Payoff Math
- Emergency Fund: How Much to Save and Where to Keep It
- How to Make a Monthly Budget That Actually Works