In general, financial advisors (and common sense) would tell you that paying down debt is a smart money move. A new report from a major mortgage lender, however, shows that while many homeowners make extra payments on their loans, those who do so often aren’t in a position to benefit.
When Rocket Mortgage analyzed extra payments made on roughly 3 million loans between January 2021 and January 2026, it found that roughly 1 in 4 mortgage borrowers made at least one extra principal payment a year.
Making extra principal payments lets borrowers pay off their loans sooner and reduces the amount of interest they’ll ultimately pay. Borrowers can do this by paying a little extra each month, making an additional payment each year or switching to a biweekly payment schedule, which yields 13 payments each year rather than 12.
“Small additional principal payments can have a surprisingly meaningful impact over time,” Bill Banfield, chief business officer at Rocket Mortgage, said in a news release. Even a single extra payment per year can add up to big savings, he added.
Based on current mortgage rates of roughly 6.7%, Rocket calculated that a typical homebuyer today taking out a 30-year fixed-rate mortgage on the median loan amount of just under $222,000 could save a whopping $68,000 in interest over the life of the loan and shorten the term by almost six years.
Pandemic-era rates scramble the math for borrowers
Historically, the advice to make extra payments has made sense, since the long-term average rate going back to 1971 is roughly a full percentage point higher than it is today, according to Freddie Mac data.
Where the math starts to break down is in more recent years, especially during and immediately after the pandemic, when rates fell to around 3% for a typical 30-year loan. Rocket found that homeowners with these “ultralow” pandemic-era mortgage rates are more likely to make extra payments.
Since they pay less interest than someone who borrowed the same amount but at a higher rate, it stands to reason that these homeowners have a little more wiggle room in their budget.
Paradoxically, though, these are the homeowners apt to derive the least benefit by following the conventional “make extra payments” wisdom.
In fact, experts say there are a couple of scenarios where getting rid of this debt might, in fact, wind up hurting you financially.
When isn’t it a good idea to pay off your mortgage early?
Even if you can afford to do so, experts say there are a couple of specific scenarios where you might not want to make extra mortgage payments.
If you have high-interest debt. The average annual percentage rate (APR) on credit cards that are assessed interest is over 22%, according to the most recent government data. Regardless of your mortgage rate, if you’re carrying a credit-card balance and you have extra money in your budget, use it to pay down the higher-rate debt first. According to credit bureau TransUnion, the average credit card borrower carries $6,610 in debt. At current rates, this typical borrower pays about $122 each month to service that balance.
“It’s almost a no-brainer to pay that higher card debt first,” certified financial planner Jaime Eckels told The New York Times. Student loan borrowers, though, have some additional factors to consider, she noted. While private loans can carry APRs similar to those of credit cards, federal loans charge much lower interest. Especially for borrowers who expect to get a portion of their student debt forgiven, making extra payments might not make economic sense.
If you have a low-rate mortgage. If you took out or refinanced a mortgage when rates were at their pandemic-era trough, paying it off early might not be in your best interest, because it’s a safe bet that you’re paying less to service that debt than any other borrowing obligations you might have.
If you have extra money in your budget, consider how else you might be able to put it to work: For instance, say you have a 3% mortgage: Rather than making extra payments, take those extra funds and buy a CD, or put the cash into a money-market account or high-yield savings account. Sure, you’ll still be paying 3% on your mortgage, but if that money is earning 4% in a savings account or 4.5% in a CD, you come out ahead.
“Don’t do it, if you have a 2.5[%] interest rate,” financial planner Christopher Price told The Washington Post. “I would rather pay them as slowly and as long as I can,” he said.
