Paying down a loan is an investment
Every extra dollar paid onto a loan stops paying interest at the loan’s rate for as long as the loan would have run. That is a return, and an unusual one: it is guaranteed, and nobody taxes interest you didn’t pay. A loan’s interest is worked out monthly, so a 7% loan costs the equivalent of 7.23% a year, the way a CD’s APY or a fund’s return is put, and paying it down earns the same. The question is not whether an investment pays more than 7%, but whether it pays more than 7.23% after its own tax.
The page weighs both ways with the same money each month. Paying down, the extra goes on the loan, and once the loan is gone, its payment and the extra are invested. Investing, the loan runs its course while the extra is invested from the start. When the loan would have been paid off, neither owes anything, so the difference between what each has invested is the whole answer.
Treasuries and CDs, after tax
On October 23, 2026, the 5-year Treasury note yielded 4.82% and the 10-year 5.00%1. Treasury interest is subject to federal tax but exempt from state and local taxes2; a CD’s interest is taxed by both. For a couple in California earning $150,000, a 5% Treasury keeps 3.88% after tax and a 4.5% CD 3.07%, well short of the 7.23% that paying down a 7% mortgage earns. To match it, the Treasury would need to yield 9.35% and the CD 10.68%. For anyone whose loan costs more than safe investments pay, paying down wins, at no risk at all.
It runs the other way for a loan cheaper than Treasuries. A mortgage taken out at 3% in 2021 costs 3.04% a year to keep, and a 5% Treasury note keeps 3.88% after tax at the same income: investing wins, with no more risk than paying down. Try it with your own rate above.
Index funds: more on average, not every time
The S&P 500 returned 10.02% a year, compounded, from 1928 through 2025, with dividends reinvested3, more than most loans cost. But an average hides the stretches that decide whether it beats paying down. The index lost 36.55% in 2008 alone, and from 2000 through 2009 it returned −0.95% a year. The page runs your strategy through every stretch of those years as long as your loan, to show how often investing would have won, and by how much either way.
In a taxable account, a fund’s dividends are taxed every year and its growth only when you sell, both at the long-term capital gains rates: 0%, 15% or 20%, depending on your taxable income4. For 2026, the 0% rate applies to taxable income up to $49,450 for a single filer and $98,900 for a couple, and 15% up to $545,500 and $613,7005. Above $200,000 of income, or $250,000 for a couple, a 3.8% net investment income tax6 applies too, to interest as well as dividends and gains. Most states tax all of it as ordinary income. Because the tax on growth waits until you sell, and is lower when it comes, a fund needs a smaller head start over the loan than a note or a CD taxed every year.
The deduction most people don’t get
Mortgage interest lowers your taxes only if you itemize, and since the standard deduction nearly doubled in 2018, most households don’t: in 2026 it is $32,200 for a couple and $16,100 for a single filer7. Take the standard deduction and the interest deduction is worth nothing, so paying down earns the loan’s full rate. If you do itemize, tick the box above, and the page counts your federal rate off every dollar of interest. The rent vs buy calculator works out whether you would.
Car loans now have a deduction of their own, which applies whether you take the standard deduction or itemize8. It covers interest on a loan for a new car assembled in the U.S., bought for personal use: up to $10,000 a year for 2025 through 2028, reduced by $200 for every $1,000 of income over $100,000, or $200,000 for a couple9. While it lasts it lowers what paying down earns, and after 2028 it ends.
Which comes first
Neither choice should come before money set aside for emergencies, or before an employer’s match on retirement savings, which beats any loan rate. And the two ways are not equally easy to undo. Money paid onto a loan stays there: a home’s equity can only be borrowed back at whatever rates are then, and a car’s hardly at all. Money invested can be sold when you need it, though perhaps at a loss. A Roth IRA keeps an investment’s growth untaxed, but you can put in only $7,500 in 2026, or $8,600 at 50 or over10.
What this page assumes
Figures are estimates for planning, not investment advice. The loan’s rate is fixed and the strategies are those on the prepayment page, or an amount of your own. Treasury notes and CDs earn their yield every year, and the fund its return, less its fee, with about 1% of it paid out as dividends; only the market’s past varies year to year. Taxes are at your rates this year, at the margin, for every year to come, with the fund sold at the end: selling a large gain in one year could push part of it into a higher bracket. States are assumed to tax dividends and gains as ordinary income, which most do. The deduction, where it is ticked, saves your federal rate on every dollar of interest; if you only just itemize, it saves less. Inflation is left out, as it erodes both ways alike. To weigh the loan on its own, with any mix of extra payments, a refinance or a recast, use the prepayment calculator.