Mortgage overpayment vs index investing

People type this into search every day: mortgage overpayment vs investing.

The usual answer is “whichever rate is higher.” That misses the part the two rates do not share. Mortgage interest you avoid is a schedule. An index-fund return is a model.

This page is a labeled example. It is not a forecast of your loan or the market, and it is not personalized financial advice.

Two jobs for the same extra cash

The mortgage overpayment vs index investing calculator sends the same monthly cash down two paths, then subtracts the remaining mortgage from the modeled investments. Home value is left out because it is the same house under both plans.

Mortgage-first adds the extra amount to principal each month. After the loan hits zero, that path invests the whole former mortgage payment for the months that are left.

Invest-first pays only the scheduled mortgage payment and puts the extra amount into the fund from month 1.

The CFPB’s servicer rules page says you may be allowed to send extra money toward principal. Confirm the servicer applies it to principal, not to the next interest charge. A prepayment penalty is a fee for paying off all or part of the loan early. It usually shows up when you clear the whole balance, often after a sale or a refinance, in the first few years.

Investor.gov’s index funds page says an index fund seeks to track a market index. Fees lower the return you keep. The Understanding fees note is the same point with a 20-year chart. Real returns move around, and this calculator holds one rate the whole way.

The published defaults

Here are the fields on that page:

• remaining mortgage balance: $320,000
• mortgage interest rate: 5.5%
• term remaining: 25 years
• extra funds each month: $500
• expected index fund return: 7%
• annual fund fee: 0.2%

The scheduled principal-and-interest payment on $320,000 at 5.5% for 25 years is $1,965.08. That is the same P × r(1+r)ⁿ ÷ ((1+r)ⁿ − 1) formula as the mortgage payment post.

Monthly cash used by both strategies: 1965.08 + 500 = $2,465.08

Net modeled investment return: 7 − 0.2 = 6.8%

At the original 25-year mark the model prints:

• mortgage-first net position: $337,498.88
• invest-first net position: $380,129.45
• estimated advantage for index investing: $42,630.57
• mortgage paid off with extra: 16 years 6 months
• mortgage interest avoided: $102,307.16

$42,630.57 is the gap between two modeled piles at month 300. It is not a guarantee that investing wins. Change the return and the winner flips.

Extra principal shortens the remaining term

The mortgage extra payment calculator is the same extra $500 on the same $320,000, 5.5%, 25-year loan, without the investment side.

Scheduled payment: $1,965.08

New payment: $2,465.08

New payoff time: 16 years 6 months

Time saved: 8 years 6 months

Interest saved: $102,307.16

That interest figure matches the vs-investing tool, because both add extra cash to principal until the balance is gone.

The CFPB amortization explainer is why early extra payments remove so much interest. The first years are mostly interest because the balance is high. Cut the balance sooner and later interest never appears.

The two paths do not cut that balance at the same speed.

Year-end balances from the monthly loop:

• year 5: mortgage-first $251,228, invest-first $285,669
• year 10: $160,746 vs $240,499
• year 15: $41,697 vs $181,070
• year 20: $0 vs $102,878

After month 198 the mortgage-first path has no loan left. It then invests the full $2,465.08 each month for the remaining 8 years 6 months.

The return you type decides the winner

Hold the $320,000, the 5.5% mortgage, the 25 years, the $500 extra, and the 0.2% fee. Change only the expected index-fund return.

At a 5% return, net 4.8% after the fee:

• mortgage-first net: $309,604.72
• invest-first net: $284,668.70
• estimated advantage for mortgage overpayment: $24,936.02

At the default 7% return, net 6.8%, invest-first is ahead by $42,630.57.

At 0% before fees, net −0.2%, mortgage-first is ahead by $103,865.72. That row is the cash-only baseline. The extra $500 never earns a return, and you still avoided $102,307.16 of mortgage interest.

The editorial guide on this tool says to run a lower return and see whether the choice still holds. 5% and 7% are that habit on the same loan.

A higher mortgage rate pulls the other way

Freddie Mac’s Primary Mortgage Market Survey for the week of October 8, 2026 puts the 30-year fixed average at 7.40%. That is a national average from purchase applications, not a quote on this $320,000 balance.

Put 7.40% on the same remaining term, the same $500 extra, and the default 7% fund return with a 0.2% fee.

Scheduled payment: $2,344.00

Mortgage-first net: $415,098.97

Invest-first net: $380,129.45

Estimated advantage for mortgage overpayment: $34,969.52

Interest avoided: $155,601.46

Payoff with extra: 16 years 1 month

The invest-first investment pile is unchanged, because the extra $500 and the fund assumptions did not change. The mortgage got more expensive, so avoiding that interest is worth more.

At a 3% mortgage and the default 7% fund, the model swings the other way. Invest-first is ahead by $120,041.53. A cheap loan leaves less interest to avoid.

The two numbers people mix up

The default run avoids $102,307.16 of mortgage interest and still shows a $42,630.57 edge for investing.

Interest avoided is the gap between two loan schedules. The $42,630.57 is the gap between two net positions after the fund has been growing for 25 years at a flat 6.8% net.

Mortgage-first interest: $167,216.83

Invest-first interest: $269,523.99

102307.16 ÷ (167216.83 + 102307.16) = 38.0% of the invest-first interest bill never appears on the mortgage-first path.

You can prefer the smaller interest bill and still lose the 25-year net-position race if the fund earns the typed 7%. You can also type 5% and watch the race reverse.

Liquidity is not in the spreadsheet

Overpayments are hard to undo. The CFPB emergency-fund guide wants cash you can reach without selling something at a bad time. The emergency fund post is that target. I would not send the last cash buffer to principal so a model can print a larger net position in year 25.

An index fund can be sold. It can also be down in the month you need the money. Investor.gov says the fund carries the same general risks as the securities in the index.

Taxes, mortgage-interest deductions, and a prepayment penalty are excluded. If any of those apply, the modeled gap moves.

A credit card at 21.9% APR is a different comparison. That interest is also a schedule, and it is much higher than 5.5%. Extra cash there is not competing with a 7% model in the same way.

Open the mortgage overpayment vs index investing calculator with the remaining balance, the rate on the statement, and an extra amount you can repeat. Run the published 7% return, then a lower one. If you only want the earlier payoff date, use the mortgage extra payment calculator. If you want the fund path with no mortgage attached, use the compound savings growth calculator. The compound interest post is the same monthly loop.