Should I Pay Down My Mortgage Faster?

Dear Kristin,

We bought our condo at the height of the pandemic, and it seemed to make sense to put all our surplus each month toward our mortgage principle. But as interest rates rise, is that still the best call, or would contributing to our high-yield savings account or investing be more beneficial? Our mortgage interest is 2.98%. 

Sincerely,

Longtime Saver, First-Time Buyer

Dear Saver, Buyer,

Congratulations on buying a home—and for locking in such a low interest rate. With mortgage rates currently hovering around 6.7%, you’re likely saving hundreds of thousands of dollars compared to what you would pay if you were making that same purchase right now.

Deciding whether you should pay down your mortgage or save is really a game of numbers. Of the varied rates on high-yield savings accounts, only a few offer interest of 3%, which is higher than the interest you’re paying on your mortgage. Though as the Fed continues to raise rates, it’s likely this number will only get higher—which would mean that in theory, you could make more money by saving than by paying down your mortgage. 

Now I say “in theory” because you haven’t told me exactly how much you plan to tuck away into this savings account. If you only plan to save $50 for example, it’s unlikely that even a 3% interest rate on savings will offset the interest you’d end up paying on your home loan. 

So this is the time to get out your calculator and figure out how much interest you are paying on your home loan each month or year, and how much interest you think you can expect from your savings. This will help you determine whether you’d be saving or losing money in both scenarios. 

Given that you are routing surplus to your mortgage payments, it’s likely you are shaving off months if not years from the total life of your loan, which could equal thousands of dollars in the long run. But your question makes me believe that you aren’t just satisfied with saving a lot of money by paying off your loan earlier and that you’d like to use your surplus funds to perhaps make some money. 

If that’s the case, have you considered investing? While markets are fairly volatile right now, if you are on the younger side and have many more years in the market, this could be an effective strategy. Now is a great time to start—or to invest more—because so many assets are available at lower prices. And while you might experience some losses for several months (or possibly even into next year), a bull market where stocks are on the rise will offer you more than 300% cumulative returns, far greater than a high-yield savings account could offer.

But perhaps, you don’t feel that you are saving enough amid these troubling times. It’s often recommended you have three to six months of emergency funds saved (I prefer six), so if you don’t have that, this would be a great time to do so. Even with robust savings, there’s nothing wrong with taking your foot off the gas of your increased mortgage payments in favor of saving a little bit more. While this will mean you won’t be able to pay your home loan as quickly (which will cost you more in the long run), you could divert some of your savings to your mortgage at a later date.

And don’t forget, the savings you currently do have could always be withdrawn and then placed into a high-yield savings account, gaining you more interest than you are probably receiving from your “regular” savings account.

-Kristin

If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.