Mortgage vs Cash Purchase Calculator
Compare the true cost of financing a home with a mortgage against paying all cash, factoring in investment opportunity cost and tax savings. Ideal for buyers deciding how to deploy capital when purchasing real estate.
About this calculator
When buying property, paying cash eliminates interest costs but sacrifices the returns you could earn investing that capital elsewhere. This calculator quantifies that trade-off. The monthly mortgage payment is found using the standard amortization formula: M = L × [r(1+r)ⁿ] / [(1+r)ⁿ − 1], where L is the loan amount, r is the monthly rate, and n is the total number of payments (360 for a 30-year loan). Over your analysis period, the calculator sums all payments, subtracts principal repaid to isolate interest paid, then applies your tax bracket to reflect the mortgage interest deduction: after-tax interest cost = interest paid × (1 − tax rate). On the cash side, it models the opportunity cost — what the purchase price would have grown to if invested at your expected return rate using compound growth: gains = P × (1 + r)ⁿ − P. The final result is the net advantage of the mortgage strategy: investment gains minus after-tax interest cost.
How to use
Suppose a $400,000 home, 20% down ($80,000), 7% mortgage rate, 8% alternative investment return, 25% tax bracket, over 10 years. Loan amount = $320,000. Monthly rate = 7%/12 = 0.5833%. Monthly payment ≈ $2,129. Total payments over 10 years = $2,129 × 120 = $255,480. After calculating remaining balance (~$277,000), principal paid ≈ $43,000, so interest paid ≈ $212,480. After-tax interest = $212,480 × (1 − 0.25) = $159,360. Cash opportunity gains = $400,000 × (1.08)¹⁰ − $400,000 ≈ $463,700. Net mortgage advantage ≈ $463,700 − $159,360 = $304,340, suggesting the mortgage strategy is financially superior.
Frequently asked questions
When does it make more financial sense to pay cash instead of getting a mortgage?
Paying cash is generally advantageous when your alternative investment return is lower than your after-tax mortgage rate. For example, if your mortgage rate is 7% and you only expect a 5% return on investments, the cost of carrying debt exceeds your investment gains. Cash purchases also eliminate monthly payment obligations, reduce risk in volatile markets, and can make offers more competitive. However, this only holds if you have sufficient liquidity after the purchase — depleting all savings to buy cash can create financial vulnerability.
How does the mortgage interest tax deduction affect the mortgage vs cash comparison?
The mortgage interest deduction reduces the effective cost of borrowing by allowing you to deduct interest paid from your taxable income, lowering your tax bill. If you're in a 25% tax bracket and paid $10,000 in mortgage interest, your real after-tax cost is only $7,500. This deduction is most valuable in the early years of a mortgage when interest payments are highest. Note that since the 2017 Tax Cuts and Jobs Act, the standard deduction increased significantly, so only taxpayers who itemize actually benefit — meaning the deduction's value depends on your overall tax situation.
What investment return rate should I use when comparing mortgage to cash purchase?
Use the long-term expected return of whatever you would actually invest the cash in. The S&P 500 has historically returned roughly 7–10% annually before inflation. If you'd invest conservatively in bonds or CDs, use a lower figure of 3–5%. The key is to be realistic and consistent — overestimating investment returns will make the mortgage option look unfairly better. Also consider that investment returns are uncertain and taxable, while mortgage interest savings are more predictable, so some financial planners recommend using a risk-adjusted, after-tax return rate.