Should I Pay Extra on My Mortgage or Invest?

This is one of the most common financial questions - and most answers overcomplicate it. Here’s a clear framework.

The Simple Version

Compare your after-tax mortgage rate to your expected after-tax investment return. Whichever is higher tells you where extra money does more work.

But there’s a critical nuance: your mortgage rate is guaranteed, and investment returns are not.

The After-Tax Comparison

Your mortgage rate (adjusted for taxes)

If you itemize deductions, your effective mortgage rate is lower than the stated rate:

After-tax mortgage rate = Mortgage rate × (1 - marginal tax rate)

Example: 6.5% mortgage with a 22% tax bracket → 6.5% × 0.78 = 5.07% effective rate

If you take the standard deduction (most people do), your effective rate equals your stated rate.

Your investment return (adjusted for taxes)

This depends on the account type:

• Roth IRA/401k: Returns are tax-free. A 7% return stays 7%.
• Traditional IRA/401k: Returns are taxed on withdrawal. A 7% return becomes ~5.5% at a 22% bracket.
• Taxable brokerage: A mix of dividend taxes and capital gains. Roughly 7% → 5.5-6%.

When Extra Mortgage Payments Win

Extra mortgage payments are clearly better when:

1. Your mortgage rate is above ~6% and you don’t itemize
2. You value certainty - the mortgage return is guaranteed
3. You’re close to paying off - the psychological win of being mortgage-free is huge
4. You’d invest in bonds or savings anyway - your mortgage rate almost certainly beats these

When Investing Wins

Investing is clearly better when:

1. Your mortgage rate is below ~4% - even conservative investing beats this
2. You have a Roth IRA with space - tax-free growth is powerful
3. Your employer offers a 401k match - that’s an instant 100% return
4. You have decades until retirement - time smooths out market volatility

The Smart Middle Ground

Most people shouldn’t go all-in on either option. Consider this order:

1. Get the full employer 401k match (instant 50-100% return)
2. Pay off any debt above 7% (credit cards, etc.)
3. Build a 3-6 month emergency fund
4. Max out Roth IRA ($7,000/year in 2024)
5. Then split between extra mortgage payments and additional investing

Run Your Own Numbers

Use our Extra Payment vs Investing calculator to see exactly how the math works for your specific situation. It compares your guaranteed mortgage savings against a range of investment outcomes - not just the average.

And if you decide to pay extra, our Mortgage Early Payoff calculator shows you exactly how much time and interest you’ll save with different strategies.

Related Guides

• The Rule of 72 - Quick mental math to estimate how fast your investments double at any return rate.
• How Much Should I Save Each Month? - A complete guide to savings targets, priority order, and where to put your money.
• Biweekly Mortgage Payments Explained - How making half your payment every two weeks quietly adds an extra payment each year and saves thousands in interest.