Educational information, not individual financial advice.
Key Takeaways
You have $500 of extra money this month. Do you put it toward your 5% mortgage or into your 401(k)? The answer involves comparing rates, but also tax treatment, risk, and behavioral factors that pure math misses.
A debt paid down earns a guaranteed, after-tax return equal to the debt's interest rate. A $10,000 payment on a 6% loan saves $600/year of interest — a 6% "return."
An investment has an expected, variable, pre-tax return. Paying that 6% mortgage vs investing in stocks earning an expected 7% real return sounds like investing wins — but:
Compare the debt's after-tax rate to your expected after-tax investment return:
Rough guidance:
| Debt rate | Default decision |
|---|---|
| 8%+ | Almost always pay down first |
| 6–8% | Lean toward paying down; depends on tax treatment |
| 4–6% | Roughly neutral; personal factors dominate |
| <4% | Lean toward investing |
| Category | Value | Share |
|---|---|---|
| Credit card 22% | 35% | |
| Personal loan 12% | 19% | |
| Stocks (expected) | 11% | |
| Car loan 7% | 11% | |
| Mortgage 6% | 10% | |
| Student 5% | 8% | |
| Mortgage 3% | 5% |
Debt rates above the expected stock return compound against you faster than investing compounds for you. Below it, investing tends to win — with uncertainty.
Tax-deductible mortgage interest. If you itemize and get a 24% tax benefit, a 6% mortgage has an effective rate of 6% × (1 − 0.24) = 4.56%. Most homeowners with post-2017 mortgages and the higher standard deduction ($32,200 MFJ in 2026) don't itemize, so the adjustment rarely applies in practice.
Investment account type. A 401(k) match is essentially a guaranteed 50–100% return on the matched amount, dwarfing almost any debt. Always capture the full match before extra debt payments. After the match, tax-advantaged account space (Roth IRA, HSA, additional 401(k)) still meaningfully tilts toward investing.
Credit score impact. Very high utilization on credit cards damages credit scores even if you're making payments. Paying down revolving balances improves scores and can lower future borrowing costs — a hidden benefit beyond the rate comparison.
Refinance potential. If rates have dropped significantly and you can refinance, do that first before deciding on extra payments.
The math doesn't capture everything. Valid reasons to pay down low-rate debt even when investing would be mathematically superior:
Uncertainty about future income. Paid-off debts reduce your fixed obligations, which matters if your income might drop (self-employed, cyclical industry, approaching retirement). A paid-off house means no foreclosure risk regardless of what happens to your income.
Psychological weight. Some people can't sleep with debt on their balance sheet, even cheap debt. If paying it off lets you take on appropriate investment risk in other accounts, the peace of mind has real value.
Approaching retirement. Entering retirement debt-free dramatically reduces required spending and therefore required portfolio size. The certainty is valuable.
Discipline. Extra mortgage payments are forced savings. Money sitting in a taxable account is temptation. If you'd otherwise spend the money, paying down the mortgage is better than the alternative.
A defensible priority order for extra monthly savings:
This isn't universally correct — individual situations vary — but it's a reasonable baseline for most households.
Your Budget Rules page lets you configure how surplus is allocated: a priority order across debt payoff, emergency fund targets, account contributions, and discretionary spending. The engine follows your rules month by month, so your forecast reflects a consistent application of your priorities. Try different rule sets in scenarios to compare the long-run outcomes.
Your mortgage is at 3.2%. You itemize and save 24% on mortgage interest. You're 35 years old with 30 years until retirement. Extra $500/month: mortgage payoff or taxable index fund?
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