Pay Off Mortgage Early or Invest? Recast vs. Extra Principal, by the Numbers

Should you pay off your mortgage early or invest the money? If you only count interest paid to the lender, extra principal always wins. But that's the wrong scorecard if you'd otherwise save the money. When your mortgage rate is below what safe savings pay after tax, recasting to a lower payment and saving the difference leaves you with more by the end of the original term. Skipping the prepayment entirely leaves you with even more. When the mortgage costs more, shortening the term wins. The calculator below compares the options and shows the savings yield at which extra principal and recast-and-save tie.

How to use the calculator

1. Pick a loan type or enter your own balance, rate and time left.
2. Enter the lump sum you'd put toward the loan.
3. Check the savings yield. It starts at a rough current estimate. Yields move with the Fed, so enter the average you expect over the years left on the loan.
4. Be honest about the freed-up money. If it would get spent, untick the box: then the only fair comparison is interest.
5. Open "More" to set your tax rate on interest, whether you itemize mortgage interest, an ARM reset, or your servicer's recast fee.

Every option gets the same monthly budget: what you'd pay without prepaying. Whatever doesn't go to the lender is freed-up money. The comparison date is when the loan would have ended on schedule; no option has debt left by then, so the bottom line is simply how much you've saved.

Recast vs. extra principal: what each does

• Extra principal. You pay a lump sum toward principal and keep making the same payment. The loan ends years early. This is what happens by default; confirm with your servicer that the money went to principal.
• Recast (re-amortization). After a large lump sum, the servicer recalculates the payment on the lower balance over the remaining term at the same rate. The payment drops, the end date doesn't move. It happens only if you ask: otherwise a lump sum just shortens the loan. Not every servicer or loan type offers it, and minimums and fees vary — some charge a few hundred dollars, some nothing. Ask before you send the money.

A recast is not a refinance: no new rate, no closing costs, no new loan. It only changes the payment.

Quick answer by loan type

The rule: compare the mortgage rate (after any tax deduction you actually get) with the after-tax savings yield. If your rate is higher, prepay to shorten the term. If it's lower, keep the cash or recast and save.

Why extra principal always wins on interest

Take a mortgage locked at 3%: $300,000 left, 25 years to go, and a $30,000 lump sum. The payment without prepaying is $1,422.63.

Extra principal saves $17,552 more interest than a recast. But the recast frees about $142 a month for 25 years — $42,679 in total. Shortening the term frees nothing until the loan is gone, then the whole payment for the last three and a half years. The money just arrives at different times, and the question is what it earns in between.

Example: a 3% mortgage at different savings yields

Same loan, a $250 recast fee for illustration, all freed-up money saved, before tax (set the tax rate to 0 under "More" to reproduce it):

Without tax, extra principal and recast-and-save tie when savings pay about what the mortgage costs — here 3.07%, a touch above 3% because of the recast fee. Below that, extra principal leaves you with more; above it, recasting and saving does, and not prepaying at all does better still.

"Recast and spend the difference" isn't in the table: you end up with no savings and will have paid the lender $17,552 more than with extra principal. That can be a fair price for breathing room, but it isn't a gain.

What moves the break-even

Tax on interest. Interest from savings accounts, CDs and Treasury bills is taxed as ordinary income; Treasury interest is exempt from state income tax. At a 22% rate, the 3% mortgage above breaks even at a savings yield of about 3.9%, not 3%.

Mortgage interest deduction. It only helps if you itemize, and it covers interest on up to $750,000 of mortgage debt taken out after December 15, 2017. If you take the standard deduction, your real rate is the note rate. If you do itemize, the deduction lowers your effective rate, and prepaying shrinks the deduction, since less interest means a smaller write-off. Only the part of your itemized deductions above the standard deduction actually saves tax. With both a 22% tax on savings and a 22% deduction, the example breaks even near 3.1%.

Rate changes. On an ARM, the rate after the fixed period matters more than today's. Enter the reset month and rate under "More".

Investing in stocks instead. This is what most people mean by "pay off the mortgage or invest." You can type an expected stock return into the yield field, but it isn't a like-for-like comparison:

• Paying the mortgage earns its rate with certainty. Stocks may earn more on average, but some years are negative, and a bad stretch right when you need the money can wipe out the edge.
• Gains in a taxable account are taxed when you sell; in a 401(k) or IRA the math changes again, and an employer match usually beats any prepayment.
• The longer the horizon, the more likely stocks come out ahead; over a few years, a guaranteed rate is hard to beat.

A reasonable middle ground: compare the mortgage with a safe yield first. If even safe savings beat it, prepaying makes little sense; if they don't, investing instead is a bet on stocks, not arithmetic.

Before you prepay: a quick checklist

• Emergency fund first, a few months of expenses in cash.
• Employer 401(k) match beats any prepayment.
• Higher-rate debt — cards, personal loans — goes before the mortgage.
• Moving within a few years? Prepaid equity only comes back when you sell.
• Paying PMI? Once the balance drops to 80% of the home's original value, you can ask the servicer to cancel it, which can make a prepayment worth more than the rate suggests.

Liquidity and "save or spend"

The math above holds only if two things are true.

1. You really save the difference. A recast that frees $142 a month only beats extra principal if that $142 lands in savings every month for 25 years. If it would quietly get spent, shorten the term instead: it saves for you.
2. You have an emergency fund. Money in savings can go to the mortgage any day. Money sent to the mortgage only comes back through a sale, a refinance or a home equity loan, on the lender's terms. Without a cushion, keep the cash first. We cover the order in pay off debt or save first.

The options combine. Recast for a lower required payment and keep paying the old amount: you get close to the extra-principal result with a smaller required payment. Or keep the cash while savings pay more than the mortgage costs, and prepay once yields fall below your rate. If you do want the loan gone, how to pay off a mortgage in 10 years walks through the payment it takes. Smaller extra payments on car loans and cards are covered in the extra payment calculator.

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