About 1 in 4 mortgage holders make extra payments on their loans, according to a recent report from Rocket Mortgage.
The analysis invites a question: Is paying extra on a mortgage a good idea?
If you kick in an additional $50 or $100 on every monthly mortgage payment, you gradually shorten the length of the loan. You also save money on interest: potentially, tens of thousands of dollars.
But mortgages tend to have lower interest rates than other loans. If you have a credit card, personal loan or home equity loan, you’re probably paying higher borrowing costs on that loan than on your mortgage.
“For a lot of people, even if their mortgage is their largest debt, dollar-wise, it also tends to be their debt with the lowest interest rate,” said Kate
Wood, a lending expert at NerdWallet.
1 in 4 mortgage borrowers make extra payments
The Rocket Mortgage analysis, based on payments by its customers, found that at least 25% of borrowers have made extra principal payments over the past five years. The rate of extra payments peaked in 2021 and 2022, an era of historically low rates, and has gradually declined in the years since.
Paying extra on a mortgage would seem to make the most sense for borrowers with the highest interest rates because they stand to save the most money with additional payments.
The Rocket Mortgage report found, however, that extra payments were more prevalent among borrowers with lower rates.
“To have a quarter of your entire book of business making extra payments suggests that it’s not just math, it’s psychology,” said Bill Banfield, chief business officer at Rocket Mortgage.
Millions of homeowners dream of repaying their mortgages ahead of schedule. Retiring with a mortgage-free home is a time-honored goal for American homeowners.
“Owning a home free and clear is aspirational,” said NerdWallet's Wood.
Repaying a mortgage early isn't always a smart move
Still, financial advisers might caution homeowners against making extra payments on a low-interest mortgage, especially if they have other debts with higher rates.
One-fifth of mortgages holders have rates under 3%, Bankrate reports. That’s lower than the current inflation rate.
Michelle Singletary, the Washington Post personal finance columnist, stirred debate in 2023 when she told readers she had repaid her 2.75% mortgage several years early.
Many commenters applauded her discipline. Others said she would have been better off investing the extra payments in the stock market.
Americans have conflicting sensibilities about the comparative virtues of investing money and paying down debt. Part of the difference may be generational.
Older Americans “are really interested in the idea of being debt-free,” Wood said.
Younger homeowners, “when they come into money, they’re more interested in investing it than in paying down their mortgage,” she said.
Extra principal payments could make a lot more financial sense for the one-fifth of current mortgage holders with interest rates over 6%, said Kara Ng, senior economist on Zillow’s Economic Research team.
“This problem is going to be very different if you have a sub-4% mortgage, versus if you have a 7-plus-% mortgage,” she said.
Here are 3 ways to pay off a mortgage early
If you’re thinking about paying off your mortgage early, here are three ways to do it.
Extra principal payments
The simplest way to repay a mortgage early, experts say, is to make extra payments.
The payments can be small: a flat $50, or rounding up to the next hundred-dollar increment. At the other extreme, you could submit a one-time, five-figure lump-sum payment and make a real dent in the principal.
Many mortgage websites make extra payments easy. Look for a button marked “extra principal,” or search for an “amortization calculator.” The calculator can show you how larger payments can accelerate your payoff date.
Wood made small extra payments every month on her last mortgage. From time to time, she consulted her loan’s amortization schedule to see how the additional payments had shortened its length.
By the time Wood sold the house, she had shaved two years off of the payoff date.
Here’s a more dramatic example of the power of extra payments, from Nadia Evangelou, principal economist at the National Association of Realtors:
On a $400,000, 30-year mortgage with a 3.5% interest rate, the monthly principal and interest payment comes to about $1,800.
By paying an extra $500 every month, the borrower can repay that mortgage in roughly 20 years instead of 30, saving $87,000 in interest.
A mortgage recast
With a mortgage recast, a borrower makes a large single payment toward the principal on a mortgage. The lender then recalculates the repayment schedule, yielding a lower monthly payment.
The main goal of a recast is to lower your payments. A recast typically doesn’t shorten the length of the mortgage.
Not all lenders offer recasts, and the transaction generally requires a large principal payment. The borrower usually pays a fee.
You’ll save some interest on your mortgage with a recast, mortgage experts say, but you’ll save more if you make the same lump-sum payment on your existing loan.
And so, whether to initiate a recast depends on your goals.
A mortgage refinance
Homeowners refinance mortgages for many reasons. One is to claim a lower interest rate. "Refis" tend to peak when rates are low, as in the early COVID-19 pandemic years, when many borrowers locked in rates of 3% or lower.
A refinance looks less attractive in September 2026. The national average rate on a 30-year fixed mortgage is about 6.75%, Bankrate reports.
If your goal is to save money, a refinance might make sense only if you can lower your interest rate by a full point or more, said Ng of Zillow. That was a cinch in 2021. It’s trickier now.
Still, “it doesn’t hurt to do the math,” she said.
Another option is to refinance a 30-year mortgage into a 15-year loan. The shorter the term, the less interest you pay, and 15-year mortgages tend to carry lower rates. But the payments are much larger.
Also, refinancing costs money. A mortgage origination fee generally amounts to 0.5% to 1% of the loan.
If your goal is to repay your loan faster, said Banfield of Rocket Mortgage, there may be no need to refinance. Instead, just pay more each month on your existing loan.
This article originally appeared on USA TODAY: Why paying off a mortgage early could be the wrong move
