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 ≈ 10%; 8% is a conservative forward assumption.
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LTCG if taxable account; 0% in a Roth. (Traditional 401(k) gains are taxed as income at withdrawal.)

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

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Net wealth at original term

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Invest the extra

Mortgage paid off in

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Investment balance at original term

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After-tax investment value

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Net wealth at original term

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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 10% nominally (roughly 7% after inflation), though many planners assume 7–8% going forward, 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 an instant 50–100% return.
  • Mortgage interest deduction. Most households take the standard deduction and get no tax benefit from mortgage interest. If your itemized deductions already exceed the standard deduction, extra interest is effectively deductible and the marginal rate becomes rate × (1 − marginal tax) — e.g. 6.5% at 22% ≈ 5.07% — but only on up to $750k of acquisition debt.
  • 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.