You’ve got an extra $500 a month. Do you throw it at your mortgage — or invest it? This question sparked a viral Reddit thread with 325+ comments, where one user ran 10,000 simulations at different rates. The verdict: your mortgage rate decides it.
Here’s the full breakdown so you can decide for yourself.
The Core Trade-Off
Extra mortgage payments earn a guaranteed, risk-free return equal to your interest rate. Investing earns a higher expected but uncertain return — historically 7–10% annually in broad stock index funds, with volatility.
The question is really: is the guaranteed return good enough, or is the market’s extra expected return worth the risk?
The Math at Different Rates
Assume $500/month extra for 10 years ($60,000 total):
- At 3% mortgage rate: Prepaying saves ~$9,700 in interest. Investing at 8% grows to ~$90,000 — a $30,000 advantage for investing.
- At 5% mortgage rate: Prepaying saves ~$17,000 in interest. Investing at 8% still wins by roughly $13,000, but the gap narrows.
- At 6.5% mortgage rate: It’s close. Prepaying saves ~$24,000 guaranteed. Investing’s edge shrinks to a few thousand — and carries risk.
- At 7.5% mortgage rate: Prepaying saves ~$29,000+ guaranteed. The risk-adjusted math now favors the mortgage for most people.
The crossover point — where the guaranteed return beats the market’s risk-adjusted expected return — sits around 6–7% for most investors.
Beyond the Raw Numbers
Risk tolerance matters. The market’s 8% is an average, not a promise. In a bad decade, returns can be flat. The mortgage paydown’s return is contractual — it cannot disappoint you.
Time horizon matters. Over 20–30 years, the market has never lost to a 5% hurdle. Over 5 years, anything can happen. Longer horizon → more reason to invest.
Taxes matter. 401(k) and IRA contributions give immediate tax benefits that prepaying can’t match. Always capture employer match first — it’s a 50–100% instant return.
Psychology matters. Some people sleep better debt-free. That peace of mind has real value, even if the spreadsheet says invest.
A Practical Decision Framework
Invest first if: rate below 5%, you have 15+ years horizon, haven’t maxed tax-advantaged accounts, comfortable with volatility.
Prepay first if: rate above 7%, you value certainty, nearing retirement, or the psychological win matters more than squeezing returns.
Split it if: rate between 5–7% — do both. $250 extra to principal, $250 to investments. You hedge both ways.
Key Takeaways
- Below ~5%: investing usually wins. Above ~7%: prepaying usually wins.
- The 5–7% zone is genuinely a toss-up — splitting is reasonable.
- Always take the 401(k) employer match before either option.
- Keep an emergency fund before aggressively doing either.
- Your rate is the single biggest variable — know it cold.
FAQs
What return should I assume for investing?
7–8% nominal (before inflation) for a broad US stock index fund is the standard long-run assumption. Subtract ~3% for inflation to get real returns.
Does this change if I itemize deductions?
Slightly — the deduction lowers your effective mortgage rate by your marginal tax rate (e.g., 7% × (1 − 0.24) = 5.32%). But most homeowners now take the standard deduction.
What about paying down to remove PMI?
That’s different — and almost always worth it. PMI is pure cost with no benefit; killing it is a top priority regardless of rate.
Run your own numbers with our mortgage payoff calculator and amortization calculator.