Should you pay off your mortgage early? If you look at the total cost of the mortgage, paying off your mortgage faster will save you money in interest, so perhaps it is that simple. (Spoiler alert: It’s not!) However, if we want to find the optimal mathematical answer, we need to factor in the interest rate, opportunity costs, investment return, and inflation rate.

In this article, we will look at 30-year mortgages and paying them off early vs. keeping them until the end of their term. We will also look at what happens when we invest alongside paying down the mortgage. To equate the total capital committed, we will invest the difference between the monthly payments into a portfolio that returns 10%, 8%, or 6%. For example, the 30-year mortgage that gets paid off faster will have a higher monthly payment than the 30-year mortgage kept until the end of the term. We will invest the difference between the monthly payments of the mortgage paid off faster and the mortgage paid off on time. Then, when the mortgage is paid off early, we will begin to invest the money we are saving from not having a monthly payment until the end of year 30. This way, at the end of 30 years, we will have committed the same exact capital, and we will be able to see which strategy was better mathematically when counting for inflation, which significantly affects the results. (Mortgages don’t adjust the monthly payment for inflation, so a $1000 monthly payment today is not the same as a $1000 monthly payment in year 20 if inflation has been present.) For all of the data you see in this article, the inflation rate was set to 3%, capital gains were 15%, and income tax was 20%.  All investment results were calculated using a Monte Carlo simulation that factored in both return and standard deviation. The table below displays the optimal way to pay your mortgage, and the rest of the article will explain how we arrived at these answers. You will notice that investing alongside paying off your mortgage is always the optimal strategy. (The cross-over points in the table represent the approximate point of what is best; depending on the size of your mortgage, it could vary ever so slightly.)

Only the 30-year rate is shown for simplicity.  Thus, if the 30-year interest rate was 7.5%, you would choose to pay off your mortgage early while also investing in all scenarios. Conversely, if the 30-year rate was 4.4% or below, you would choose to pay off your mortgage over the full term while also investing in all scenarios. If you have a 15-year mortgage that you are considering paying off early, the math will remain the same, so just use your interest rate to determine the answer. 

High Interest Rate Mortgage

We will examine paying off a $400,000 mortgage (but we could use any size mortgage, and we would arrive at the same results) in a high-interest rate environment, 7%, as seen during 2023 and 2024. (High interest rates relative to the last 20 years are a bit below average when considering the past 100 years.) In order to pay off the mortgage early, we will pay exactly enough extra per month to cut the pay off time in half. (From 30 years to 15 years.)  (You can use calculators like this one to see how much extra per month you would need to spend in order to cut your mortgage in half.)

We have four strategies listed below: pay your 30-year mortgage off in 30 years, pay it off early in 15 years, pay it off early in 15 years while also investing, and pay it off in 30 years while also investing. Not surprisingly, paying off a 7% mortgage early results in a higher monthly payment and considerable money saved on interest, although not as much is saved when you factor in inflation. Now, let’s see what happens when we invest and pay down our mortgage.

To equate paying off the mortgage early vs. keeping it until the end, we must invest the difference between the monthly payments so that the total capital spent is the same. Paying off the mortgage early results in higher monthly payments, so no money is invested for the first 15 years. The 30-year mortgage payoff invests $940 per month for the first 15 years, and then it stops adding to the investment, at which time, the 15-year payoff will begin to invest $2,661 a month. (The first two columns show paying off the mortgage without investing)

Putting it all together, with a 10% investment return, paying off your mortgage normally and investing was the best option, with paying off your mortgage early and investing a close second. Investing while paying down your mortgage was much better than not investing. (The investment account shows as cash for the 30-year mortgage and 15-year payoff, as that reflects the money saved but not invested.) (For simplicity, we aren’t factoring in the home’s end market value, which is why the net result is negative.)

Now, let’s look at an 8% investment return.  Here, paying off your mortgage early and investing is now the best choice.

Lastly, here’s a 6% investment return. Paying off your mortgage early and investing is the best strategy and becomes more and more beneficial relative to paying off your mortgage normally as you lower your expected investment return. This should be intuitive, as the higher the mortgage interest rate, the higher the investment return we need to benefit from not paying off the mortgage earlier. If our investment return of 6% is beneath our mortgage interest rate of 7% and we pay off our mortgage normally while investing, we would actually be better off paying off the mortgage early and not investing!

When your mortgage rate is 7%, we can conclude that paying off your mortgage early and investing is best if your expected investment return is less than 10%. 

But what happens to the strategies in a lower interest rate environment?

Low Interest Rate Mortgage

Now, we will look at a $400,000 mortgage at 4.4% (again, we could use any size mortgage, and we would arrive at the same results). As in the high-interest rate example, paying off our mortgage early (in half the time, or 15 years) will save us money on interest; however, it is not nearly as significant as before. (Mortgages don’t adjust the monthly payment for inflation, so a $1000 monthly payment today is not the same as a $1000 monthly payment in year 20 if inflation has been present. At low interest rates, this makes paying the mortgage off normally more attractive. The higher the inflation rate, the more this is true.)

With the low-interest rate and 10% investment return, paying off your mortgage normally and investing significantly outperformed paying it off early and investing. The lower interest rates provided a much lower total mortgage cost.

With an 8% investment return, the 30-year mortgage pay off, and investing is also an easy winner here.

Finally, here’s a 6% investment return. The 30-year mortgage pay off and investing are barely a winner here again, and as we saw before, the lower the investment return, the more the 15-year loan benefits due to the interest saved. (Again, this should be intuitive, as the investment account makes up for the extra interest cost of a 30-year loan.)

When the 30-year mortgage rate is 4.4% and the investment account has an expected annual return of 6% or more, the 30-year mortgage pay off and investing is better than the early mortgage payoff and investing.

Conclusion

When choosing whether to pay off your mortgage early, be sure to factor everything in, as the correct result isn’t always what it appears to be at first glance.  Once again, here is the optimal way to choose pay off your mortgage. 

James Di Virgilio

Author James Di Virgilio

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