Should You Pay Off Your Mortgage Early or Invest? Worked Examples at 3% and 7.5%

The Rate Comparison That Decides Mortgage Payoff or Investing

Paying extra on a mortgage earns a guaranteed return equal to the mortgage rate, before taxes, while an investment return is an assumption. If your loan charges 3%, every extra dollar of principal earns 3% with certainty. If your loan charges 7.5%, every extra dollar earns 7.5% with certainty.

Compare two numbers: your mortgage rate and the annual return you expect from investing the same money. In the examples that follow, a 3% rate lost to both a 5% and a 7% assumed return. A 7.5% rate beat both.

Two groups of readers face this choice with very different rates. Owners who locked in a loan near 3% are one group, and new borrowers paying around 7% to 7.5% are the other. Mortgage Bankers Association (MBA) data reported by the National Association of Home Builders (NAHB) put the September 2026 average 30-year fixed contract rate at 7.1%.

Check today's rate on the Freddie Mac Primary Mortgage Market Survey (PMMS) page before you plug a number into the comparison.

Worked Example for a Locked-In Owner at 3%

For a locked-in owner at 3%, investing the extra $500 a month ended ahead of prepaying at both a 5% and a 7% assumed return. The example starts with a $300,000 balance at 3% and 25 years (300 months) left, with a required payment of $1,422.63 a month. Paid on schedule, the remaining interest totals $126,790.

On the prepay path, adding $500 a month pays the loan off in 199 months, about 16.6 years. Total interest drops to $80,729, a saving of $46,061. After payoff, this path invests the freed-up $1,922.63 a month (the old payment plus the extra $500) for the remaining 101 months, through month 300.

On the invest path, you keep the regular payment and invest $500 a month for all 300 months. That puts $150,000 of contributions into the account. Here is where each path stands at month 300:

• Invest $500 a month from month 1: $297,755 at 5%, $405,036 at 7%
• Prepay, then invest $1,922.63 a month after payoff: $240,821 at 5%, $263,479 at 7%
• Invest-first lead: $56,934 at 5% ($297,755 minus $240,821) and $141,557 at 7% ($405,036 minus $263,479)

Both paths finish month 300 with the mortgage fully paid, so the gap is the size of the investment account. The invest-first account carries market risk that the prepay path avoids while the loan is open. The $46,061 of interest saved is guaranteed.

Worked Example for a New Borrower at 7.5%

For a new borrower at 7.5%, prepaying the extra $500 a month ended ahead of investing it at both a 5% and a 7% assumed return. The example is a $300,000 loan at 7.5% over 30 years, with a payment of $2,097.64 a month. Paid on schedule, total interest is $455,152.

Adding $500 a month pays the loan off in 206 months, about 17.2 years. Total interest falls to $233,428, a saving of $221,724. The prepay path then invests the freed $2,597.64 a month for the remaining 154 months.

The invest path keeps the regular payment and invests $500 a month for all 360 months, which adds up to $180,000 in contributions. At month 360, the totals look like this:

• Invest $500 a month from month 1: $416,129 at 5%, $609,986 at 7%
• Prepay, then invest $2,597.64 a month after payoff: $559,292 at 5%, $645,302 at 7%
• Prepay lead: $143,163 at 5% ($559,292 minus $416,129) and $35,316 at 7% ($645,302 minus $609,986)

A guaranteed 7.5% beat an assumed 7%, with no market risk on the extra $500 while the loan was open. New borrowers still choosing a loan type can compare a fixed vs adjustable-rate mortgage before deciding how much to prepay.

What the Examples Leave Out

The worked examples use level payments and monthly compounding, and they leave out several items that can move your result. They do not include:

• income taxes on investment gains
• the mortgage interest deduction
• investment fees

The 5% and 7% returns are assumptions chosen to show a range. They are not forecasts of what any account will earn over 25 or 30 years.

The guaranteed-versus-uncertain difference also sits outside the totals. A dollar of interest saved by prepaying is locked in at the loan rate. A projected account balance depends on returns landing close to the assumption for the full period, so give the guarantee extra weight when the two paths end up close.

The figures are arithmetic and are not tax advice. Your after-tax result depends on your own tax situation, which the examples do not model, so treat the gaps above as pre-tax gaps.

A Decision Rule to Pay Off Your Mortgage Early or Invest

Prepay when your mortgage rate is at or above the return you expect from investing, and invest when the expected return is clearly higher and you can accept market risk. Here is how the two examples line up with that rule:

• Rate near 3%, expected return of 5% to 7%: investing ended ahead by $56,934 to $141,557 in the locked-in owner example.
• Rate near 7.5%, expected return of 5% to 7%: prepaying ended ahead by $35,316 to $143,163 in the new borrower example, with no market risk on the extra payments.
• Rate and expected return close together: the guarantee deserves more weight.

Capture any employer 401(k) match, build a starter emergency fund, and handle high-rate debt before applying this rule. Those steps come first in the pay off debt or invest guide.

Two changes would flip the verdict. If you expect investments to earn less than 3%, prepaying a 3% loan wins on the same guaranteed-return logic. If you expect returns above 7.5%, the 7.5% case moves toward investing, though that higher return would still be uncertain.

Where the Extra Money Should Go First

Extra money should go to an employer 401(k) match, a starter emergency fund, and high-rate debt before either extra mortgage payments or investing. That order comes from our pay off debt or invest guide.

Once the match is captured, compare a 401(k) vs Roth IRA (individual retirement account) for your retirement dollars. Size your cushion with how much emergency fund you need before you lock extra cash into the loan.

If you choose prepayment, check your loan for a prepayment penalty and tell your servicer that extra money should apply to principal, as the Consumer Financial Protection Bureau (CFPB) advises on its page about paying extra on a mortgage. More mortgage tools sit on the mortgage hub.

Then enter your balance, rate, and extra amount in the extra payment calculator. Run the same monthly amount through the compound interest calculator, and compare both totals before you decide whether to pay off your mortgage early or invest.

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