Pay off mortgage early vs invest the difference

You have extra cash flow. Two choices: kill the mortgage faster, or invest the difference in the market. Which wins depends on the spread between your mortgage rate and your expected investment return.

Your situation

$
%
$
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S&P 500 long-run nominal return ≈ 8%.
%
LTCG on taxable; 0% if in Roth/401k.

Pay down mortgage

Mortgage paid off in

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Interest saved

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Then invest freed-up cash until original term

—

Net wealth at original term

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Invest the extra

Mortgage paid off in

—

Investment balance at original term

—

After-tax investment value

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Net wealth at original term

—

The math of the trade-off

Paying down a 6.5% mortgage is a guaranteed 6.5% return — you save 6.5% in interest you would have paid. Investing in the market has historically returned about 8% nominally, but with volatility and capital gains taxes. So the spread is:

expected market return × (1 − tax rate) vs mortgage rate

At 8% expected return × (1 − 15% LTCG) = 6.8% effective, vs a 6.5% mortgage rate, investing wins by a hair on expected value. The closer the rates, the more other factors dominate.

What "other factors" means

  • Risk. Mortgage payoff is guaranteed; market returns are not. Some years the market is +25%, some it's −20%. Paying down is the certain choice.
  • Liquidity. Money in a brokerage is accessible. Money in your house is not (HELOCs help but cost). If you lose your job, $100k in an index fund is a safety net; $100k of extra equity is paperwork.
  • Tax-advantaged space. If your extra cash could fill a 401(k) match or Roth IRA, do that first. The match is a 100% return.
  • Mortgage interest deduction. If you itemize, the effective mortgage rate is rate × (1 − marginal tax). On a 6.5% rate at 22% marginal, that's 5.07% effective — making investing look better.
  • Sleep. Some people emotionally cannot stand carrying a mortgage. The peace of mind has value, even if the spreadsheet says otherwise.

What most planners suggest

Pay off after: (1) high-interest debt, (2) emergency fund, (3) 401(k) match, (4) Roth IRA. Then, if your mortgage rate is <5% and you're confident in long-term investing, invest the extra. If your rate is >7%, pay down. If it's 5–7%, do half-and-half and don't overthink it.