Should You Make Extra Mortgage Payments? How to Know What’s Right for You

Clients ask me all the time whether making extra mortgage payments is really worth it. In fact, I just got an email this week from someone asking me to fact check an Instagram post talking about the so-called “extra mortgage payment theory.” 

Since I get this question so often, I thought I’d write an article about it. Because there is so much personal finance content on social media—some good, some not so good—it’s important to step back and understand the principles behind the advice.

The truth is simple: Accelerating the payment of any debt will save you interest over time. That being said, it doesn’t automatically mean your mortgage should be your first priority.

Before you start sending extra money to your lender, here’s the five-part framework I use with clients to help them decide whether paying down a mortgage early makes financial sense.

(1) Start With the Most Important Question: What Is the Interest Rate?

When creating a debt payoff strategy, I look at all the debt a client carries, including their

• Mortgage
• Home equity loans
• Credit cards
• Student loans
• Personal loans

Then I ask two them key questions:

Which among those debts has the highest interest rate? This is the debt that costs you the most and should get attention and typically be paid down first. For many people, this ends up being credit cards—not the mortgage.

Is my mortgage rate higher or lower than what I’m earning on my investments? This is where the decision becomes more strategic.

(2) Compare Your Mortgage Rate to Your Investment Growth

Let me give you an example. Let’s say your mortgage interest rate is 4.5 percent and you’re earning 7 percent on your investments. That’s a 2.5 percent margin you get to keep. You are like the bank in this scenario. Ask yourself if you want to prioritize debt acceleration or add more money to your investments. In this particular example, it makes more financial sense to keep the mortgage intact for as long as you can make more money on your investments. This makes it so you eventually end up with enough money to pay off the mortgage and have a substantial savings account.

(3) But What About High-Interest Debt Like Credit Cards?

If you were to do the same exercise with credit cards, which Forbes reports the average credit card rate as of Nov. 24 is 25.32 percent, then you would find that they charge an interest in excess of what you’re earning on your investments so you’re losing money by prioritizing investing. In those cases of high-interest-rate debt, it makes most sense to pay down the debt instead of adding to investments.

(4) The Bi-Weekly Payment Strategy (A Simple “Free” Accelerator)

Considering all of the above, there’s nothing wrong with breaking your mortgage in half and paying it every two weeks. Doing so effectively has you adding one more payment throughout the year. Even though the mortgage might not be your highest priority, this is still a smart and painless way to accelerate the payoff.

Let me break down the math of how the bi-weekly payments add an extra mortgage payment a year.

• You make 26 half-payments per year
• That equals 13 full payments, instead of 12
• You add one extra mortgage payment per year without feeling a major budget impact

Let’s see that through an example of a 30-year, $300,000 mortgage at 6.5%. Breaking the payments into bi-weekly payments could potentially shave four to five years off the life of the loan, potentially saving you $80,000 to $100,000 in interest.

Most lenders allow bi-weekly payments for free—just confirm they apply payments immediately rather than holding them.

(5) Decide What’s Right for Your Unique Situation

Paying off a mortgage early can be a great move. But it isn’t automatically the right move. Personal finance is “personal” because everybody’s situation is different. You need to consider many factors before you take a course of action.

Before you decide, consider:

• Your interest rates across all debts
• Your investment growth rate
• Your financial priorities and cash-flow needs

The right choice is the one that helps you reach your long-term financial picture, no matter what the online financial experts tell you.

If you want help evaluating your own situation, I’m happy to run personalized numbers for you. If you want to take me up on that offer, email me at daniel@ipwadvisors and send me your:

• Loan balance
• Interest rate
• Remaining term

And I can show you some potential savings and tradeoffs so you can make a confident decision. There’s nothing I love more than seeing people reach their financial goals, so if paying off your mortgage faster is one of them, I want to help.

This material contains general information to help you understand basic financial planning strategies. Nothing in this article should be construed as a recommendation for your personal situation, nor should it be used to make decisions before you discuss your needs with your financial advisor.