Pay off a 3% mortgage or a 7% mortgage early? The answer flips at your break-even return

By DecisionSheet · Updated September 22, 2026 · 2026 tax figures

Paying extra on a mortgage and investing the same money are two uses of one monthly amount, and DecisionSheet's mortgage calculator runs them side by side. It also reports the market return at which the two end level, the break-even return. On a $400,000 loan with $400 a month to spare, that break-even is 3.04% at a 3% mortgage rate and 7.23% at 7%. Which path the calculator favors comes down to whether the return assumed is above or below that figure.

What the model compares

Both scenarios below are the calculator's default house: a $500,000 price, $100,000 down, a 30-year fixed loan, and $400 a month on top of the required payment. The two loans differ in one input, the rate.

The model follows two paths for the full 30 years (360 months) and compares them at the end, when both loans are paid and only the investment accounts differ.

• Invest the extra. The regular payment goes to the loan, which runs its full term. The $400 goes into an investment account every month.
• Prepay, then invest. The $400 goes to principal until the loan is gone. Whatever the final payment does not need is invested that month, and from then to the end of the term the whole freed amount (the old principal-and-interest payment plus the $400) is invested every month.

Both paths spend the same money each month; only where it goes differs. At a 7% rate the prepay path clears the loan in 20 years 7 months and then invests $3,061 a month for the remaining 113 months. The invest path puts in $400 a month for all 360. The mortgage rate is one input the invest path never sees, so it ends at $563,420 whichever loan it sits beside.

The break-even return and how to read it

The calculator finds the break-even by rerunning the whole simulation at different market returns until the two paths finish level. It does not move with the return assumed: the 8% and 6% scenarios below share the same break-even at each rate.

The number is the mortgage rate restated in the terms the market return is entered in. The loan charges one-twelfth of its annual rate each month (0.583% at 7%), which compounds to 7.23% over a year; the market return is an annual rate. The reported break-even is that compounded figure at both rates: 7.23% at 7% and 3.04% at 3%. A dollar prepaid avoids interest at the loan's rate, and a dollar invested at that same rate grows exactly as fast, so the two paths finish level there.

To read it: an assumed return above the break-even and the model ends with the invest path ahead; below it, the prepay path.

The two rates side by side

Open each case: 3% at 8% · 7% at 8% · 3% at 6% · 7% at 6%.

At the calculator's default 8% return, both loans come out in favor of investing, by $277,198 at 3% and $56,885 at 7%. The invest path ends at $563,420 beside either loan, so the whole difference between those two leads is on the prepay side: $286,222 at 3%, $506,535 at 7%.

Lower the assumed return to 6%, the calculator's "Conservative" preset, and the two loans part company. The 3% loan still favors investing, by $126,416; 6% is still above its 3.04% break-even. The 7% loan flips: 6% is below its 7.23% break-even, and prepaying ends $70,115 ahead.

The chart shows the two shapes at 7%. The invest path builds from the first month; the prepay path holds nothing in the account until the loan is gone, then adds $3,061 a month and finishes $56,885 behind.

What an expected return really is

The market return in this calculator is an assumption, not a forecast. The model applies the same annual rate every month for 30 years: no losing years, no sequence of good and bad years, no fees. A real portfolio's return is not known in advance, while the interest a prepayment avoids is fixed by the loan's terms. The model puts both on the same footing and does not price that difference in certainty.

The comparison is also pre-tax. It does not deduct mortgage interest, which is deductible only for those who itemize (IRS Publication 936), and it does not tax investment gains, dividends or withdrawals. Neither adjustment is in these numbers, and both would change them.

The inputs that move the answer

• Mortgage rate. The break-even follows it: 3.04% at 3%, 7.23% at 7%.
• Expected market return. It decides which side of the break-even the scenario falls on, without moving the break-even itself.
• Extra payment, loan term and price. They change the dollar amounts but not the break-even. At 7%, setting the extra to $100 or $1,000, the term to 15 years or the price to $750,000 leaves it at 7.23%.
• Property tax and insurance. The calculator shows them in the monthly total ($5,500 and $1,500 a year here), but they are the same on both paths and have no effect on the comparison.

The companion guide, What an extra $100, $250 or $500 a month does to a 30-year mortgage, covers the payoff side alone: years cut and interest saved.

Assumptions and limits

• Fixed-rate loan, interest charged monthly at one-twelfth of the annual rate. No refinancing, no sale of the house before the end of the term.
• The expected return is a constant annual rate converted to an equivalent monthly rate. It is an input the reader chooses, not a prediction.
• Pre-tax throughout: no mortgage interest deduction, no tax on investment returns.
• The paths are compared once, at the end of the term. The model does not value having cash available earlier, or owning the home outright earlier.
• No prepayment penalty is modeled. Some mortgages carry one, typically for paying off the whole balance within a set number of years, usually three or five; the CFPB explains how they work.

Method and sources

The model is calculateMortgage in the mortgage payoff vs. invest calculator. The monthly payment is the standard fixed-rate amortization formula. The two paths are simulated month by month, and the break-even return is found by bisection against that same simulation, so it agrees with the simulation's own result. Every figure above is produced by running the model on the inputs in the scenario links.

• IRS Publication 936, Home Mortgage Interest Deduction: home mortgage interest is deductible only when deductions are itemized on Schedule A. The model does not apply this deduction.
• CFPB: What is a prepayment penalty?: a fee some lenders charge for paying off all or part of a mortgage early.

Open this scenario in the calculator

All figures on this page come from the Mortgage Payoff vs. Invest calculator. Change any input there and the numbers update.