Mortgage Prepay vs Invest: 5,000 Rate-Environment Scenarios

Every r/personalfinance thread on this topic devolves into "but stocks return more on average" vs "but the mortgage rate is guaranteed." We swept 5,000 cells of (mortgage rate × expected equity return × horizon) to find the exact line where the answer flips.

Finding 1: The crossover is approximately the equity return

Across all 50 equity-return values we tested, the prepay-vs-invest crossover sits within ~50 bps of the equity return itself. At 5% expected equity returns, prepay wins above 5.02% mortgage rate. At 7% equity, the line moves to 7.14%. At 10% equity, 9.92%.

This is closer to a clean equality than the textbook answer suggests. The 50–100 bps offset comes from two effects in opposite directions: the prepay strategy invests freed cashflow once the mortgage is paid, lifting its terminal value; the invest strategy doesn't get the volatility drag that real equities have (we used deterministic returns).

Finding 2: At today's ~6.7% mortgage rate, prepay is genuinely competitive

Freddie Mac PMMS shows 30-year conforming mortgage rates near 6.7% through Q2 2026. At that rate, the answer depends entirely on your forward equity-return assumption:

Finding 3: Shorter horizons favor prepay more than the rate gap suggests

On a 15-year horizon at 7% equity, the crossover drops to 6.98% — meaning even a 5%-ish mortgage rate flips toward prepay. Why? Shorter horizons compound the equity advantage less, so the "guaranteed" mortgage-rate return matters more in relative terms.

Practical implication: if you're 10–15 years from your planned payoff date or retirement, the prepay case is materially stronger than the standard 30-year framing implies.

What we did NOT model (and why it matters)

• Taxes. Mortgage interest deduction (for itemizers), capital gains, retirement-account tax shield — all shift the math. For a typical non-itemizing household post-TCJA, the impact is small. For high-income itemizers, prepay loses some of its appeal.
• Sequence-of-returns risk. Real equities don't deliver a clean 7% — they deliver -30%, then +25%, then -15%. The mortgage rate is genuinely guaranteed in a way deterministic equity returns in our model are not.
• Liquidity. Prepayments are illiquid; invested dollars aren't. If you need cash urgently, you can't easily get it out of a paid-down mortgage without a refi or HELOC.
• Behavioral guarantees. Prepay forces a savings outcome. "Invest the difference" requires you to actually invest it — most people don't.
• Employer match. If the prepay money would otherwise go into a 401(k) with a match, invest wins by a huge margin no matter the rates.

Methodology

• Sweep: 50 mortgage rates (2.0%–10.0%) × 50 equity returns (2.0%–12.0%) × 2 horizons (15-yr, 30-yr) = 5,000 cells. Deterministic, no random sampling.
• Loan: $400,000 principal, fixed amortizing mortgage.
• Extra payment: $500/month — either to mortgage (prepay strategy) or to a separate investment account (invest strategy).
• Prepay strategy: $500/mo extra applied to principal until mortgage is cleared. Once cleared, the full original monthly payment ($mortgage + $500) flows into investments for the remainder of the horizon.
• Invest strategy: Pay only the required mortgage payment. Put $500/mo into investments throughout the horizon. Subtract any remaining mortgage balance at horizon-end from terminal wealth (clean comparison).
• Compounding: Monthly for both legs. Deterministic returns (no volatility modeling).