Mortgage Prepay vs Invest: 5,000 Rate-Environment Scenarios
This deterministic sensitivity analysis compares a fixed-rate mortgage prepayment scenario with investing the same monthly amount under assumed nominal returns. It varies the mortgage rate, investment return, and loan term across 5,000 combinations; it is not a forecast or a personal recommendation.
Finding 1: The crossover depends on the stated assumptions
In this deterministic model, the estimated 30-year crossover is 5.02% at the closest tested 5% nominal investment-return input, 7.14% near 7%, and 9.92% near 10%. These are model outputs for the stated cash flows, not general thresholds for borrowers.
The mortgage-rate grid advances in about 0.16 percentage-point steps, so each displayed midpoint is only a coarse estimate. Returns are smooth monthly assumptions; the model excludes market volatility, taxes, fees, and changing loan terms.
Finding 2: A current market benchmark can be tested as a separate scenario
Freddie Mac's weekly PMMS average for a 30-year fixed mortgage is 7.28% as of 2026-10-01. This is a market survey average, not a personalized quote. Each row models a $400,000 mortgage and $500/month. The table is a separate 30-year sensitivity slice at that rate, outside the 5,000-case grid. Investment returns are assumptions, not forecasts.
| Mortgage rate | Assumed nominal investment return | Prepay terminal value | Invest terminal value | Difference | Higher modeled value |
|---|---|---|---|---|---|
| 7.28% | 2.0% | $473,421 | $246,363 | $227,058 | Prepay |
| 7.28% | 3.4% | $513,382 | $313,769 | $199,613 | Prepay |
| 7.28% | 4.9% | $557,776 | $405,308 | $152,468 | Prepay |
| 7.28% | 6.3% | $607,152 | $530,603 | $76,548 | Prepay |
| 7.28% | 7.7% | $662,127 | $703,347 | $-41,220 | Invest |
| 7.28% | 9.1% | $723,401 | $943,075 | $-219,674 | Invest |
| 7.28% | 10.6% | $791,765 | $1,277,748 | $-485,983 | Invest |
| 7.28% | 12.0% | $868,115 | $1,747,482 | $-879,367 | Invest |
Finding 3: The two terms are separate loan scenarios
The 15-year and 30-year cases each amortize a separate loan over its listed term. They are not the same mortgage observed at two future dates, so their crossovers should not be read as a retirement-timing rule.
What the model leaves out
- Taxes. Mortgage-interest deductions depend on eligibility and tax situation; investment-account tax treatment also varies. See IRS Publication 936.
- Market paths. Returns are fixed monthly assumptions. Actual returns vary over time and can include losses; this model does not simulate volatility or sequence risk. See Investor.gov's overview of stock risks.
- Liquidity and access. Prepayment reduces liquid cash and may require later borrowing to access home equity. Investments may be sellable, but values can fall and retirement accounts can have tax or withdrawal restrictions.
- Other household factors. Emergency savings, higher-rate debt, employer-plan terms and matches, fees, and ability to maintain either strategy can change a real decision.
Methodology
- Sweep: 50 mortgage rates (2.0%?10.0%) ? 50 nominal investment returns (2.0%?12.0%) ? two loan terms (15 and 30 years) = 5,000 deterministic cases.
- Loan: $400,000 starting principal, fixed rate, monthly amortization. Each horizon is also the amortization term.
- Monthly amount: $500 is either applied as recurring extra principal or invested at each month-end.
- Prepay case: apply the extra to principal until payoff, then invest the remaining cash flow. Any unused cash in the payoff month is invested at that month's end.
- Invest case: pay the scheduled mortgage payment and invest the extra monthly amount. Subtract any remaining loan balance at the horizon.
- Rate convention: annual mortgage and investment rates are divided by 12 and compounded monthly. Returns are constant nominal assumptions; there is no inflation, tax, fee, or volatility model.
- Grid limits: rates are evenly spaced; reported crossovers are midpoints between adjacent tested mortgage-rate values, not precise break-even quotes.
Primary references
- Freddie Mac PMMS ? weekly mortgage-rate benchmark (2026-10-01); a survey average, not an individual quote.
- CFPB: mortgage prepayment penalties ? review contract terms and applicable rules.
- IRS Publication 936 ? U.S. mortgage-interest deduction rules.
- Investor.gov: stocks and investment risk ? market values and returns are uncertain.
Frequently asked questions
Is paying off a mortgage better than investing?
This study does not produce a universal answer. Under the stated $400,000 loan, $500/month cash flow, fixed-rate and constant-return assumptions, the modeled crossover is 7.14% near a 7% nominal investment return for the 30-year scenario. Taxes, fees, volatility, liquidity and your actual loan terms can change the comparison.
What mortgage rate favors prepayment in this model?
The 30-year crossover changes with the assumed investment return: it is 5.02% near 5%, 7.14% near 7% and 9.92% near 10% in the tested grid. These are coarse model midpoints, not advice or a market threshold.
What does the mortgage prepayment study leave out?
The sweep uses smooth fixed monthly returns and excludes market volatility, sequence risk, taxes, fees, changing rates, refinancing, emergency reserves and the value of liquidity. Run your own inputs and verify the loan contract before making a decision.
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