What this tool does
This calculator compares two strategies for deploying your available cash when buying a home. In Scenario A, you put your extra cash toward a larger down payment, which reduces the mortgage principal, lowers your monthly payment, cuts total interest costs, and may eliminate the need for private mortgage insurance (PMI). In Scenario B, you make a smaller base down payment and invest the extra cash in the market, betting that investment returns will outpace the mortgage interest and PMI costs you incur by borrowing more.
The tool runs a full month-by-month amortization for both scenarios, tracks PMI duration accurately based on when your loan-to-value ratio drops below 80%, compounds investment returns monthly, and factors in property appreciation to compute realistic home equity over time. It then outputs net wealth for each strategy at every year boundary so you can see exactly when one approach overtakes the other, along with detailed breakdowns of monthly payments, total interest, total PMI, investment growth, and the final wealth difference.
The side-by-side comparison and year-by-year line chart make it straightforward to understand the trade-off between guaranteed mortgage savings and the potentially higher but uncertain returns from investing. You can adjust every input to model your specific situation, from mortgage rate and term to expected investment return and property appreciation rate.
How it calculates
The core mortgage calculation uses the standard amortization formula: Monthly Payment = P * [r(1+r)^n] / [(1+r)^n - 1], where P is the loan principal, r is the monthly interest rate (annual rate divided by 12 and by 100), and n is the total number of monthly payments (term in years times 12). For a zero-percent rate, the payment is simply the principal divided by the number of months.
PMI is applied whenever the original down payment is below 20% of the home price. Each month, the calculator checks whether the remaining loan balance exceeds 80% of the original purchase price. If it does and the down payment was below 20%, PMI for that month equals (original loan amount times the annual PMI rate) divided by 12. Once the balance drops to 80% or below, PMI stops. The calculator counts the exact number of months PMI is charged and tallies the total cost.
For the investment scenario, the extra cash grows with monthly compounding: Investment Value = ExtraCash * (1 + annualReturn / 12 / 100) ^ (months). Property appreciation is calculated as: Home Value at Year Y = Original Price * (1 + appreciationRate / 100) ^ Y. Home equity at any point equals the appreciated home value minus the remaining mortgage balance.
Net wealth for each scenario is defined as home equity at the end of the time horizon minus total mortgage interest paid minus total PMI paid. For Scenario B, net wealth also adds the investment portfolio value. The year-by-year breakdown uses snapshots taken at each 12-month boundary, allowing you to see how the two strategies diverge or converge over the full projection period.
Who should use this
First-time homebuyers who have saved more than the minimum required down payment and want to know whether that extra cash works harder inside their home or inside a brokerage account. The conventional wisdom to always put 20% down to avoid PMI is not always the wealth-maximizing move, and this tool quantifies the trade-off.
Repeat buyers and move-up buyers deciding how much equity from a previous home sale to roll into the next down payment versus diverting some into investments. Financial planners and mortgage advisors who need a quick projection to show clients the long-term impact of different down payment strategies. Real estate investors evaluating whether leverage (smaller down payment) combined with market investing outperforms lower leverage on a primary residence.
Anyone refinancing who is considering making a lump-sum principal payment versus investing that same amount. While the tool is framed around a purchase, the underlying math applies to any lump-sum-toward-mortgage-vs-invest decision.
Worked examples
Example 1: A buyer is purchasing a \$400,000 home. They have \$80,000 available beyond closing costs. The base down payment is 10% (\$40,000), leaving \$40,000 of extra cash. The mortgage rate is 6.5% on a 30-year term, expected investment return is 7%, PMI rate is 0.5%, and property appreciation is 3%. In Scenario A, the down payment is \$80,000 (20%), loan amount is \$320,000, monthly payment is approximately \$2,023, and no PMI is charged. In Scenario B, the down payment is \$40,000 (10%), loan amount is \$360,000, monthly payment is approximately \$2,275, PMI runs for roughly 100 months at about \$150 per month, and the \$40,000 invested at 7% grows to about \$305,000 over 30 years. After 30 years, Scenario B typically produces higher net wealth because the investment returns compound well above the mortgage rate, despite the extra interest and PMI paid.
Example 2: Same home and rates but a shorter 10-year time horizon. The \$40,000 investment only grows to about \$80,000 over 10 years. Meanwhile Scenario A has saved roughly \$28,000 in avoided interest and about \$15,000 in avoided PMI. Over just 10 years, the difference between the strategies narrows considerably, and depending on exact rates, the larger down payment may actually come out ahead. This illustrates that time horizon is one of the most important variables in the comparison.
Limitations
The calculator assumes constant rates for both the mortgage and investment returns. Real mortgage rates are fixed at origination (for fixed-rate loans), but investment returns fluctuate dramatically year to year. A sequence of poor returns early in the investment period can significantly reduce the advantage of Scenario B compared to what a flat average return suggests.
Taxes are not modeled. Mortgage interest may be tax-deductible (subject to limits), which effectively reduces the cost of borrowing and favors smaller down payments. Conversely, investment gains in taxable accounts are subject to capital gains taxes, which reduces net investment returns. If the investment is held in a tax-advantaged account like a Roth IRA, the effective return improves.
The tool does not account for the difference in closing costs between the two loan amounts, the possibility of refinancing, adjustable-rate mortgage structures, or the behavioral risk that the extra cash intended for investing may be spent instead. PMI removal is modeled based on the original purchase price reaching 80% LTV, but some lenders require an appraisal or have waiting period rules. The monthly payment savings from a larger down payment are not reinvested in this model, which slightly understates the advantage of Scenario A.
FAQs
Q: Does this calculator account for investing the monthly payment savings from a larger down payment? A: No. In Scenario A, the lower monthly payment frees up cash each month, but this model does not assume that surplus is invested. If you were to invest those monthly savings, Scenario A's net wealth would increase. For a conservative comparison, the tool only considers the lump-sum investment of the extra cash in Scenario B.
Q: What investment return rate should I use? A: The long-term historical average for a diversified US stock portfolio is roughly 10% nominal or 7% after inflation. A balanced stock-and-bond portfolio historically returns around 6-8%. Use a rate you believe is realistic for your risk tolerance and investment approach. Running the tool at several rates (5%, 7%, 9%) gives you a range of outcomes and helps you understand how sensitive the result is to this assumption.
Q: When does the larger down payment strategy win? A: It tends to win when mortgage rates are high relative to expected investment returns (for example, a 7.5% mortgage with only 5% expected investment return), when the time horizon is short (under 7-10 years), or when PMI costs are high. It also wins in the psychological sense for risk-averse buyers who prefer the certainty of lower debt over the uncertainty of market returns.
Q: How does property appreciation affect the comparison? A: Property appreciation increases home equity equally in both scenarios since both buyers own the same house. However, it does shift net wealth figures upward for both, which can change the relative gap. Higher appreciation makes home equity a larger share of total wealth, slightly reducing the relative advantage of outside investments.
Q: Is PMI always wasted money? A: PMI is a cost with no direct return to the borrower, so in that sense it is a pure expense. However, paying PMI can be worth it if the alternative use of that cash (investing) generates returns that more than offset the PMI cost. The calculator explicitly models this trade-off so you can see whether the investment gains outweigh PMI and extra interest combined.
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