Mortgage Payoff Analysis

25 Dec 2025

A common discussion I have is about paying off a mortgage early. The reason that this comes up is obvious. We are generally taught that Debt and Interest are bad, and it looks bad!

I bought a house in the summer of 2025. I paid $175,000 for it, and I got a loan for $140,000. My interest rate is 6.75% on a 30-year mortgage. I am projected to pay $186,893 in interest over the life of the loan. On my first 12 payments, I am projected to pay $12,696, but only $1,492, 11.75% will go to principal. It hurts to see that, especially early on while payments are mostly going to interest.

There are various strategies that you can read about to take years off your mortgage and not feel like a financial sacrifice. One you hear a lot is to pay bi-weekly, so that you finish the year paying the equivalent of 13 payments instead of 12. This strategy is touted to reduce the length of the mortgage by four years. Another common strategy is to pay an extra $50 or $100 per month. More complex strategies exist that involve a HELOC loan or other strategies.

For example, if I paid an extra $100 per month in my scenario, I would pay $53,789 less in interest over the life of the loan. The loan would be paid off in 22.58 years, 7.5 years ahead of schedule. On the surface, this seems like a great thing if I can afford an extra $100 per month.

A core principle of Finance is the Time Value of Money. The idea is that "A dollar today is worth more than a dollar tomorrow." The driver of this is a few things, inflation is the obvious one, but the real driver is Opportunity Cost. Money in your hand today can be invested and grown while the same amount of money tomorrow has missed out on growth. I would call Time Value of Money a Paradigm, which is a good word meaning a way of looking at or thinking about something.

In the "Debt is Bad" paradigm, paying down the mortgage as quickly as possible is the obvious choice. Looking through a Time Value of Money lens, we will see that in terms of our total wealth at the end of a 30-year period, paying down the mortgage will result in you being less wealthy.

Case Study

So as a case study, we will look at my home purchase. You can play with the spreadsheet I built for this analysis at Mortgage Payoff Analysis Again, I paid $175,000 for the house and got a $140,000, 30-year mortgage at 6.75%. We will directly compare two scenarios, one paying an additional $100 per month, and one paying just the monthly payment and investing the $100 per month. Once the loan is paid off, we will assume that all of the money previously dedicated to the monthly loan payment is invested. We will assume an average return in the market of 8.5%, that the property appreciates 2% per year, and that escrow items are $150 per month. This setup simplifies our decisions and wealth. Our decision is what to do with an additional $100 per month, and our wealth is defined as the equity in the home and the value of the investments. You can see the results in the table below.

Alright, let's unpack this. So by paying the loan off faster with an additional $100 per month, I will save $53,789 in interest. I will be able to invest $53,789 more over the 30-year period. I will be done with payments almost 7.5 years earlier. But, we see that at the end of 30 years, I will be $40,521 less wealthy driven by higher investment value. How?

When you first look, it is confusing how the $36,000 invested in the scheduled payment scenario can be worth more than the $89,789 invested in the accelerated payment scenario at the end of 30 years. The reason for this is because we do not start investing the $89,789 until 22.58 years into the scenario. This only leaves it 7.42 years to grow. In contrast, the money invested instead of paid to the mortgage will have decades to grow. The $100 we invest in the first month will have grown 1270% over the 30-year period.

Some Conclusions

The difference between the interest rate on the loan and the investment return is a big part of this. If the interest rate is increased to 8.5%, matching the investment return, there is no difference in wealth at the end of 30 years. If the Interest rate exceeds the investment return, the accelerated payment scenario will result in more wealth at the end of 30 years. The smaller your interest rate relative to the investment return, the worse the accelerated payment scenario will perform. I encourage you to download the sheet and see this for yourself.

Paying Bi-weekly and other similar strategies are going to have similar results. I would need to model the HELOC strategies to see how they compare, but those also leave the realm of simple strategies.

A few things I want to note about this analysis. It assumes that escrow payments continue at the same rate for 30 years. This is not true, but it will not affect the principle demonstrated by our scenario. This ignores all other investments, the rest of your wealth, etc. and simplifies down to how you invest the payment of your mortgage and an additional $100 per month. A key assumption is that you are investing this money, not spending it! If you are going to spend that extra $100 on things you don't need, then you should just pay it into your mortgage. The principle demonstrated by this analysis is only valid if you are disciplined about investing. This analysis also ignores tax implications of paying down the mortgage or investing.

What should we take away from this analysis?

1. The "Debt is Bad" paradigm may not result in the highest wealth
2. When the rate of our loan is lower than the rate of return on our investments, paying down the loan faster will result in less wealth
3. We cannot let large interest numbers scare us or stop us from looking deeper into what is the most optimal decision

Paying off debt is a good thing. It reduces risk and relieves stress for many people. If you want to pay down your debt faster and can afford to, then do it! The point is that from a Time Value of Money perspective, it is not necessarily the decision that will result in the largest wealth. I pay an additional $25 per month extra on my mortgage. I will likely quit doing this when my payments include more principal than they do currently.

I would also point out the flexibility of investing the additional money instead of locking it up in the equity of your home. If you put this money into a brokerage account, you can invest it for a while and then do whatever you want with it. It is liquid. You could even decide to pay down the loan with that money later. If you pay down the loan ahead of schedule, you will need to sell the home or do some sort of refinance to use that money for anything else. This may not be the case if you put it into a tax-deferred account or some other investment that is not liquid.

In conclusion, I encourage you to think about how quickly to pay down your mortgage in the context of your goals. If getting rid of the debt is the priority, proceed with the accelerated payments. If maximizing wealth or investing in other opportunities is your priority, then don't feel like you have to pay down the loan as quickly as possible.