Invest $200 a Month or Pay Down Your Mortgage Faster?
Short Takeaway
The core question: Is it better to put an extra $200/month into a stock index fund, or to use it to pay off a $300,000 mortgage faster?
That extra upside comes with market risk and behavior risk (panic selling, spending the money early, not staying consistent). Extra mortgage payments give you a guaranteed return equal to your mortgage rate and the certainty of being debt-free on a fixed schedule.
The Comparison Grid: Mortgage Rate vs Investment Return
Each cell below answers one question:
“By the time an ‘extra $200’ plan would have paid off the mortgage, how much better or worse off am I if I INVEST the $200/month instead?”
Positive numbers → Investing wins by that amount. Negative numbers → Extra mortgage payments win by that amount.
| Mortgage Rate ↓ / Investment Return → | 7% / year | 10% / year | 13% / year |
|---|---|---|---|
| 4.0% mortgage (loan fully paid in ~23.8 yrs with +$200) | ≈ +$53,000 | ≈ +$140,000 | ≈ +$290,000 |
| 5.0% mortgage (loan fully paid in ~23.6 yrs with +$200) | ≈ +$38,000 | ≈ +$121,000 | ≈ +$265,000 |
| 6.5% mortgage (loan fully paid in ~23.1 yrs with +$200) | ≈ +$11,000 | ≈ +$89,000 | ≈ +$220,000 |
| 8.0% mortgage (loan fully paid in ~22.5 yrs with +$200) | ≈ −$18,000 | ≈ +$53,000 | ≈ +$172,000 |
How to read it: For example, a 6.5% mortgage and 10% investment return (middle of the grid) means that, by the time the “extra $200” plan pays off the mortgage, investing instead is likely to leave you about $89,000 ahead after clearing the mortgage balance from the investment account.
The Core Example in Detail (Most Likely Scenario)
Let’s zoom in on a realistic case that matches many current mortgages:
- Mortgage: $300,000, 30-year fixed at 6.5%
- Extra cash: $200/month
- Investing: diversified stock index fund averaging 10%/year in a tax-optimized account
- Horizon: up to the point where extra payments would fully pay off the mortgage → about 23.1 years (277 months)
Strategy A – Invest the $200/month
- You pay the standard mortgage payment (about $1,896/month).
- You invest $200/month into a diversified index fund.
- After 23.1 years:
- Investment account is roughly $215,000.
- Remaining mortgage balance is roughly $126,000.
If, at that point, you decide to use the investments to pay off the mortgage in one shot:
$215,000 − $126,000 ≈ $89,000 left over after clearing the loan.
So at the 23.1-year mark:
- Your house can be fully paid off, and
- You still have about $89,000 in net extra wealth compared to the pure extra-mortgage strategy.
Strategy B – Pay the Extra $200 onto the Mortgage
- You pay $1,896 + $200 = $2,096/month to the mortgage.
- You make no investments with that $200.
- After about 23.1 years:
- The mortgage is fully paid off.
- Your investment account is $0.
At that same point in time, both strategies leave you with the same house, but the investing path leaves you with about $89,000 more net wealth in this “most likely” scenario.
Pros and Cons of Each Approach
Numbers are important, but they are not the whole story. Risk and behavior can easily flip which choice is best for you.
Option 1 • Extra Mortgage Payments
Pros
- Guaranteed return: Every extra dollar you pay down earns a risk-free return equal to your after-tax mortgage rate.
- Debt-free sooner: The extra $200 can cut years off the loan, improving cash flow and reducing stress.
- Psychological clarity: Being mortgage-free is a big emotional win for many people.
- No market crashes: You’re not exposed to stock volatility on that $200/month.
Option 1 • Extra Mortgage Payments
Cons / Risks
- Lower long-run upside: Historically, diversified stocks have beaten typical mortgage rates. You may be leaving tens of thousands on the table.
- Less liquidity: Money in home equity is harder to access (refi, HELOC, or selling) if you need it.
- Rate risk: If interest rates fall and you refinance lower, you spent years “earning” a return on a high rate that no longer exists.
Option 2 • Invest the $200
Pros
- Higher expected return: If long-run stock returns exceed your mortgage rate (e.g., 8–10% vs 4–6.5%), investing usually wins over decades.
- Compounding power: $200/month over 20+ years can grow into six figures even with modest returns.
- Flexibility: Investments are more liquid; you can choose later to pay off the mortgage, keep both, or use funds for other opportunities.
- Easy to automate: Automatic monthly contributions reduce the risk of “forgetting to invest.”
Option 2 • Invest the $200
Cons / Risks
- Market volatility: Your portfolio can drop 30–50% at times. If you panic and sell, the advantage disappears.
- Behavior risk: It’s tempting to raid investments for cars, vacations, or short-term needs.
- Income risk: Job loss or reduced income might force you to stop investing or sell investments at a bad time.
- Never actually paying off the house: In theory you keep the money growing and pay the mortgage later; in practice, some people end up with both debt and less wealth if they spend the portfolio.
- Sequence-of-returns risk: Bad returns early in the journey can hurt the long-run result, even if the average return looks okay.
Behavioral & Practical Considerations
- Will you actually stick to the plan?
Extra mortgage payments are simple and hard to undo. Investing requires not pausing, not raiding the account, and not panicking in crashes. - Can you automate it?
Best case: automatic extra mortgage payment and/or automatic monthly investment into a diversified fund. Automation lowers behavior risk. - How stable is your income?
More stable income makes the investing strategy easier to stick with. Less stable income makes early debt payoff more attractive. - How much do you value being debt-free?
If the emotional benefit of being mortgage-free is huge for you, that alone can justify taking a somewhat lower expected return.
Putting It All Together
If you zoom out and look at the probabilities:
- In most realistic futures where your long-run stock returns beat your mortgage rate, investing the extra $200/month is likely to win, often by tens of thousands of dollars or more.
- In futures where mortgage rates are very high and investment returns are weaker, attacking the mortgage can win, sometimes by a modest but meaningful amount.
The “right” answer is less about squeezing every last dollar out of a spreadsheet and more about your risk tolerance, income stability, and personal comfort with debt versus market volatility.