Should you pay extra on your mortgage in 2022?

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Don’t make a decision about your home loan that you will end up regretting.


Key points

  • Paying extra on your mortgage can save you money on interest.
  • You can get out of debt faster if you make extra mortgage payments.
  • Despite the benefits, paying extra for a mortgage isn’t good for everyone.

A mortgage is a huge debt for most people, and it can feel like a financial albatross when you pay your bill each month and look at how much you owe. If you’re tired of constantly sending money to the bank and spending it on interest, you might be tempted to try making extra mortgage payments in 2022 to pay off your loan faster.

Before you do that, however, there are a few key questions to ask yourself to help you decide if paying more than the minimum on your mortgage is really the right decision.

1. Do you have any other debts?

Most other types of debt are more expensive than mortgages. For example, credit card interest rates tend to be much higher than the rate you would pay on a typical mortgage.

If you have other types of debt that you pay interest on, it usually makes more sense to spend your extra money on paying off that debt rather than making extra mortgage payments.

Chances are those other debt balances will be lower, so you should be able to wipe them out faster than you could wipe out your mortgage. This will free up extra money in your monthly budget sooner. And you’ll save more by getting rid of the most expensive debt before your cheaper mortgage.

2. What is your mortgage interest rate?

When you prepay debt, your return on investment (ROI) is the interest saved. Therefore, you need to think about the interest rate you are paying on your home loan in order to calculate your return on investment.

Most people have fairly affordable mortgage interest rates. In fact, recently rates were below 3% on even the most popular 30-year mortgage. Although rates have been rising lately, they are still low by historical standards.

If your rate is relatively high, you may want to consider refinancing to lower it. This might be a better approach to saving money than paying extra on your mortgage, as even an “expensive” mortgage won’t usually have a rate much higher than 4%. This means that your return on investment is capped at a fairly low level when you pay off your mortgage debt ahead of schedule.

3. What else could (or should) you do with your money?

Unless you have unlimited funds, you have to make choices about where your money goes. Therefore, you should consider the opportunity cost of paying extra on your mortgage in 2022.

If paying extra on that loan means you won’t be able to maximize retirement accounts, earn your full employer on your 401(k), or save for big, big purchases, then you probably shouldn’t. focus on creating an additional home. loan repayments.

Likewise, you could probably get a better return on investment even investing in a taxable brokerage account, given that the S&P 500 has produced average annual returns of around 10% over the long term. That’s a much better return on investment than the return you get from avoiding interest on a low-rate mortgage.

4. Is your mortgage interest tax deductible?

Finally, if you itemize your taxes, you should be able to deduct mortgage interest on loans up to $750,000. This means that the government subsidizes the interest you pay, which is another reason not to focus on paying off your mortgage debt sooner than expected.

Considering the answers to these four key questions, you may decide that paying extra on your mortgage in 2022 doesn’t make sense.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.

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