Extra Mortgage Payments These Days: Yes or No?

Soon I will be at 1/3 of the time of the term of my 30-year mortgage. (I have paid a little bit extra on it for the last few years, however, so we should be slightly "ahead" of the time, principal-wise.)

My gut feeling is always that we should use any "extra" money we may get throughout the year to pay down more on that enormous load of debt.

But my husband thinks that given the high rate of inflation for the last several years, it's better to save our "extra" money in our savings account. His reasoning is that the worth of earned money is changing, while worth of the decade-old fixed debt is not, and that disparity is "in our favor," so to speak. It will be "easier" to pay off the debt later as money value continues its relative changing.

Who is right?

With one additional payment a year and an additional 125.00 for each payment we cut over ten years on a 30 year mortgage. Unless you have a phenomenal rate on your savings account I think paying anything into your mortgage over the minimum pencils out better. Getting into the last third of the note the amount of money going to interest v principle would be less but depending on the notes rate I think it would be better than what current savings accounts offer.

I think it depends on the mortgage rate and whether it's fixed or variable.

If you're locked in at a very low fixed rate, investing elsewhere lets you work the "spread" to your advantage.

If it's a variable rate like mine, which went crazy when interest rates spiked, slamming spare dollars on the principal is a pretty safe bet.

I have always gone by the advice a bank president gave me when I was young.  Limit the cost of my house to no more than 2.5 x my annual income. Pay 20% down.  Have a 10 year mortgage.

I have added making 1/2 of my monthly payment every 2 weeks.  That adds an extra payment a year.  The payment every 2 weeks also reduces the overall interest paid.

Of course, there may be numerous reasons for a different approach, but this approach has worked for me.

I don't like telling anyone what to do with their finances, especially considering there is not a technically right or wrong answer, other than if you were to default on your mortgage. That would be a 'wrong' answer.

My thought is that inflation doesn't have really anything to do with the answer, or consideration. What IS worth considering, is 2-fold. It's going to depend on the interest rate you have on your mortgage, AND, what you actually do with the 'extra' principle that you are paying on your house each month.

If your interest rate on your mortgage is 'high' (defining what is 'high' is going to be somewhat an individual matter unless your rate is like something around 13% or below 2%. (I know people with either/both of these), I AM NOT A FINANCIAL PROFESSIONAL, paying extra on your mortgage is well worth considering as paying this extra (equivalent of 1 'extra' payment a year) will shave 7 years off the length of your mortgage. You have to start this the first year to get this full effect, but the savings is substantial regardless when you start.

The flip side of this is if you have a 'low' mortgage rate. You would still save interest fees if you paid it off early, but the savings would not be as significant. In this case, if you took that extra money and invested it long term say at something that averages around 15% increase per year on your investment (retirement accounts can/do do this.....seek a financial advisor), you would be money ahead to do this.

Also give consideration to refinancing your mortgage when/if appropriate. This can save you money as well.

When we bought our house (15-16 years ago) we got an interest rate somewhere around 5.7%. We were paying half a month's mortgage payment every two weeks (I get paid every 2 weeks so this works great for us).  This works out to an extra months payment each year. Additionally, we refinanced our house to a lower interest rate about 4 years ago (beginning of pandemic as I remember doing the paperwork outside, in my driveway) to a rate of (no one be jealous, please) 1.875%. We still make the same amount in each payment as we started out at (yes, considerably more principal paid each month now with the lower rate) and we still get the extra payment in each year (every 2 weeks, remember).  Total, that will shave about 11-12 years off the initial 30 year mortgage. At about $1,250/month, that is.....15K/year cost/savings = 180K over the 12 'final' years of the mortgage. The question is, could you have taken the difference in payment towards principal and saved/invested it in such a way to be worth more than the $180K over the initial 30 year term for the loan? Also, consider that (and this is not reflected in the above calculation) at the conclusion of the above payments, 11-12 years early, the payments could then go towards savings/investment and grow that $180k to a considerably larger size.....more than $500K is plausible. This is what is possible with compounding interest off a 'tiny' investment.

John F Dean wrote: I have added making 1/2 of my monthly payment every 2 weeks.  That adds an extra payment a year.  The payment every 2 weeks also reduces the overall interest paid.

Agreed, you save interest by increasing payment frequency.

At the front end of my mortgage, I was able to arrange weekly payments, and bumped them up from the minimum (default) to the maximum amount they would allow. This had a huge impact on the total interest cost because the extra money was knocking down the principal. The bank of course tried to talk me out of this, since they would make less money (they even gave me a big fat line of credit to dig me in deeper; i simply bump it once a year so it doesn't go dormant; it's great for my credit score). The upshot is that I'll be mortgage free by Christmas -- 9.5 years total.

And this will be me:

I'd consider paying extra if your interest rate is around 5-6% or higher.

If your interest rate is less than 5%, then you could earn more by putting the money in a high-interest savings account (or something else). You would also lose the tax benefits of a mortgage.

Unless the interest earned on your money keeps up with the inflation rate, you're literally losing value by keeping money in a savings account. Your money is better put to use by investing it in things that will increase in value at or higher than the inflation rate......like a house.

While my inclination is to always pay off a mortgage early, it's important to balance that with fluid assets that be moved around to generate cash flow.

I knew some retired folks who were house-rich but cash-poor in their later years. It was not a happy situation.

I'm no expert, but to my observation: a brokerage account with index-pegged ETFs will earn (over time) more than: your mortgage interest, any passbook or CD option, and even the worst inflation rates we've seen in the last few decades. So money you invest thus will grow faster than the debt you would be paying off with that same money will shrink. If you were asking about paying a mobbed up loan-shark or credit card debt down, that will almost always be the right choice, but with more reasonable interest rate debt, that doesn't seem so to me. But even a wise investment is probably not as valuable as buying tools that you can capitalize properly (or that make life worth living).

ETA: So even if your goal is to pay off the house as quickly as possible, I think it's actually smarter to sock money into the brokerage fund and wait until you have enough to cover the note, paying it off all at once -- that gets you out of it even faster than overpaying it does, while retaining the flexibility to reallocate that money elsewhere if emergencies dictate. (It might be reasonable to consider that flexibility a bad thing if you don't aren't completely rational and disciplined.)

In my own experience, having paid off my mortgage 9 years early (two years ago, just before the interest rates started rising), being debt free was worth every hardship we endured.  We threw everything at our mortgage and denied ourselves what everyone else seemed to be treating themselves to:  nice car, vacations, even "small" things like eating out or buying new clothes.  Every extra penny really did go onto our mortgage except for our emergency fund--which meant we could pay in cash for, well, emergencies, like when our ancient boiler died we could replace it immediately and not go back into debt.  

Part of the pleasure of being mortgage free is actually the release from that debt;  it felt like a weight around my neck, and to be so insecure about our housing was a real worry.  My husband works for a bank and all day he talks to people on the phone who are in arrears on their mortgages;  sometimes he comes out with awful stories:  people having an unforeseen change in circumstances and suddenly they are in danger of repossession.  Not long ago he was talking to someone who had come home from work only to find her locks had been changed (apparently she had been so stressed out by her financial situation she had stopped opening her letters).  It happens to people all the time, just ask my husband:  loss of a job, sudden illness, or other life change.  Now they can't pay their mortgage.

The other pleasure was the instant raise we got once we were paid off.  Our monthly payment was around £350, but by the end we were paying an extra £450 on top of that.  Suddenly we have all this money!  We could afford to take a vacation or get a new car!  Actually we don't want either and are sticking to our low-consumption lifestyle, but are upgrading our home with needed repairs and energy-efficiency retrofitting;  also we are padding out our savings for hopefully early retirement.  Having a house no one can take from us, being debt free and in a position to save is the best feeling.

I don’t think there is one simple “right” answer.

Personally, I look on mortgage payments as just another living expense. The question is then whether to increase your living expenses now in order to reduce your living expenses in the future. Which option makes the most sense depends on your financial situation now, your expectations for the future, and your personal preference and goals about how to spend your money.

My spouse and I did end up paying off a 30 mortgage at year 13, but it wasn’t through planned monthly payments. Rather, we paid our minimum for a dozen years while kids were young, expenses were high, and earnings were middling. Then we hit a couple years where we were both earning better and built up enough savings that paying mortgage off in full was doable, so we did. Of course that mortgage  was half what it would be now for same house and low interest to boot.

Debt is not some bad scary burden, in my point of view. It’s just a way to spread expenses out over time to make them more manageable. Yes, be thoughtful and scrutinize the terms, but same is true of any large purchase.