You have extra cash each month. Should you throw it at your mortgage or invest it elsewhere? The answer depends on your interest rate, tax situation, investment returns, and financial goals.

Let's break down the math and the psychology to help you decide.

The Case for Extra Mortgage Payments

Guaranteed Return Equal to Your Interest Rate

Every extra dollar you pay toward principal saves you that dollar times your interest rate in future interest charges. With a 7% mortgage, extra payments earn a guaranteed 7% return.

In today's market, 7% guaranteed is compelling. You can't get that from savings accounts, CDs, or bonds without risk.

Interest Savings Add Up Fast

Example: $400,000 mortgage at 7%, 30-year term

$100/month—about $3.30/day—saves $62,000 and cuts 4 years off your mortgage. That's real money.

Forced Savings

Extra mortgage payments build equity whether the market is up or down. You can't panic-sell your home equity during a crash the way you might dump stocks.

Peace of Mind

There's something powerful about owning your home outright. No mortgage payment means lower monthly expenses, more flexibility, and reduced financial stress.

Lower Risk in Retirement

Entering retirement without a mortgage payment dramatically reduces your required income. Your portfolio can be smaller, or it can last longer.

The Case Against Extra Mortgage Payments

Opportunity Cost

Money paid toward your mortgage can't be invested elsewhere. Historically, the stock market has returned about 10% annually. If your mortgage is at 7%, you might earn more investing the difference.

Example over 20 years:

• Extra $500/month toward 7% mortgage: Saves $193,000 in interest
• Same $500/month invested at 10%: Grows to $378,000

The investment approach comes out ahead—but it's not guaranteed.

Tax Considerations

Mortgage interest may be tax-deductible if you itemize. A 7% mortgage effectively costs less after the deduction.

After-tax mortgage cost = Rate × (1 - Marginal Tax Rate)

If you're in the 24% bracket:

7% × (1 - 0.24) = 5.32% effective rate

This makes the hurdle lower for alternative investments to beat.

Liquidity Trap

Home equity is illiquid. You can't easily access it for emergencies without selling or taking a HELOC. Cash or investment accounts are more flexible.

Low-Rate Mortgages

If you locked in a 3% rate in 2020-2021, the math strongly favors investing over extra payments. You can earn 5% in a savings account with no risk—why pay down a 3% loan faster?

The Math: When Each Strategy Wins

Extra Payments Win When:

1. Your mortgage rate exceeds expected investment returns after taxes

• 7%+ mortgage vs uncertain stock returns

2. You're risk-averse

• Guaranteed 7% beats uncertain 10%

3. You're close to retirement

• Eliminating the payment provides security

4. You have a fully-funded emergency fund and retirement accounts

• Extra cash truly is "extra"

Investing Wins When:

1. Your mortgage rate is low (under 4-5%)

• Hard to beat with safe alternatives

2. You're in a high tax bracket

• Deductible interest reduces effective rate

3. You have a long time horizon

• More time for investments to compound

4. You're comfortable with market volatility

• Can stomach the ups and downs

A Decision Framework

Step 1: Fund Your Foundation First

Before extra mortgage payments OR investing:

• Build 3-6 months emergency fund
• Get full 401(k) employer match
• Pay off high-interest debt (credit cards)

These always come first.

Step 2: Compare After-Tax Rates

Calculate your effective mortgage rate after any tax deduction. Compare to realistic expected returns (not best-case).

If the spread is small (1-2%), other factors dominate. If the spread is large (4%+), the math is clear.

Step 3: Consider Your Timeline

• 5+ years to retirement: Lean toward investing
• Under 5 years to retirement: Lean toward mortgage payoff
• Planning to sell soon: Neither—save cash for transaction costs

Step 4: Assess Your Risk Tolerance

Be honest. Will you panic during a 30% market drop? The guaranteed return of extra payments might suit you better.

Step 5: The Hybrid Approach

Why choose? Many people do both:

• Max retirement accounts for tax advantages
• Make some extra mortgage payments for guaranteed return
• Keep emergency fund liquid
• Sleep well at night

Extra Payment Strategies

If you decide to make extra payments, here's how to maximize impact:

1. Lump Sum Payments

Apply bonuses, tax refunds, or windfalls directly to principal. One-time $5,000 payments can save $10,000+ in interest.

2. Round Up Payments

$2,661 mortgage? Pay $2,700. The extra $39/month barely affects your budget but adds up.

3. Biweekly Payments

Pay half your monthly payment every two weeks. You'll make 26 half-payments (13 full payments) per year instead of 12. That extra payment shaves years off your loan.

4. Targeted Principal Payments

If you have variable income, make extra payments when cash flow is good. Label them clearly as "principal only."

5. Refinance to a Shorter Term

Instead of voluntary extra payments, lock in a 15-year term. Forces faster payoff with lower rates (15-year rates are usually 0.5-0.75% lower than 30-year).

Common Mistakes to Avoid

1. Paying Extra While Carrying High-Interest Debt

Credit card debt at 20%+ always gets paid first. Guaranteed 20% return beats guaranteed 7%.

2. Skipping Tax-Advantaged Retirement Accounts

401(k) matches are free money. Don't pay down a 7% mortgage while leaving a 100% match on the table.

3. Draining Emergency Funds

Extra mortgage payments aren't liquid. Keep 3-6 months expenses accessible.

4. Not Specifying "Principal Only"

Make sure extra payments reduce principal, not future interest. Confirm with your servicer.

5. Analysis Paralysis

Both options build wealth. Don't overthink it to the point of doing neither.

Key Takeaways

• Extra mortgage payments provide guaranteed return equal to your interest rate
• $100-500/month extra can save $62,000-193,000 on a $400,000 mortgage
• Low-rate mortgages (under 4%) favor investing over extra payments
• High-rate mortgages (over 6%) make extra payments more attractive
• Consider after-tax mortgage cost vs realistic investment returns
• Fund emergency savings and get 401(k) match before extra payments
• The hybrid approach (do both) suits many people

There's no universally right answer. The best choice depends on your specific rate, risk tolerance, timeline, and financial goals. Run the numbers, but also trust your gut—peace of mind has value too.