You’ve probably heard the advice that you should make a few extra payments toward your mortgage principal each year. The overarching goal? You’ll pay off your mortgage faster, which means you’ll save thousands of dollars in interest.

While that’s a great strategy for some people, it’s not necessarily always the best course of action. Rather than making extra principal payments, a savvier choice could be to put that money to use elsewhere — it all depends on your unique financial situation.

“The most important thing that anybody can do is take a look at their holistic financial picture,” says Brian Rubenstein, senior director at Ally Home. “For every dollar you want to put toward your mortgage, make sure you’re evaluating where you’re going to get the biggest bang for your return.”

Your house is an asset that, in most cases, gains value over time. Though having a mortgage absolutely means you’re in debt, many financial experts consider this “good debt” because it’s backed by a tangible asset with real, growing value — in other words, you could sell your house tomorrow and immediately pay off your mortgage, which is not the case with other types of debt, like credit card, student loan, or medical debt.

“Some people think of their mortgage payment as sort of like renting — they’re making this big payment to live under this roof,” Rubenstein says. “The huge difference is this payment, this roof, is something that over time you’ll own and something that’s growing in value.”

Remember: There’s no one-size-fits-all approach to your finances. But here are five scenarios to consider that might make you think twice about trying to pay off your mortgage early.

You have high-interest debt.

Rather than make extra payments toward your mortgage principal, consider paying down high-interest debt first. This can include credit card, student loan, medical, and car loan debt, just to name a few.

This one boils down to a difference of simple dollars and cents. Because of the power of compounding, high-interest debt just snowballs into a bigger and bigger number the longer you wait to pay it off, and the interest rate you’re paying for this debt is almost certainly higher than the interest rate on your mortgage.

“At least right now, the (mortgage interest) rate environment is at historic lows, so that equates to what I call very cheap money in terms of borrowing power,” Rubenstein says.

Case in point: The average credit card interest rate is between 14.6 and 17.9 percent, according to WalletHub’s most recent Credit Card Landscape Report, whereas the average mortgage interest rate was 3.11 percent in 2020, per Freddie Mac. Your credit card company is charging you a much higher rate to borrow money compared to your mortgage lender (almost five times as much, based on the averages), so it’s in your best interest to pay down high-interest debt first.

You don’t have an emergency fund.

If you’re like many people, coming up with the down payment for your house likely wiped out any emergency savings you’d built up. Before you even think about making extra mortgage payments, go ahead and build back up your emergency reserve funds so that you won’t be caught off guard when your car craps out, you get laid off, your furnace dies, or some other expensive problem occurs. Make yourself whole again, then start thinking about other best uses for your money.

You haven’t started saving for retirement (or you’re not maxing out your savings).

Saving for retirement also involves the power of compounding, but unlike with debt, compounding is your best friend when you’re saving money. The earlier you start investing, the more your money will grow by the time you’re ready to retire — check out a retirement savings calculator to see for yourself.

If you haven’t started saving for retirement yet, or you’re not maxing out your retirement savings accounts, it’s a good idea to prioritize that over making extra mortgage payments. Your money will grow by leaps and bounds in these retirement accounts while, at the same time, your house will be appreciating in value.

If you’re already maxing out your retirement savings accounts, you may still want to consider investing extra cash in stocks, mutual funds, and other investment vehicles, which typically average a much higher rate of return than what your mortgage lender is charging you to borrow money.

“It’s very tempting to think through, ‘If I paid down an extra thousand dollars a month on my mortgage, I could shave off three to four years.’ The flipside of that is, at what expense? What am I giving up, what am I doing to potential other levels that could be an impediment down the road?” Rubenstein says.

You have a big tax bill.

Remember that homeownership comes with some great financial perks, including the ability to deduct mortgage interest on your income taxes. If you’re in a high tax bracket, you’re self-employed, or you just otherwise want to lower your tax bill, having a mortgage can actually be a big benefit. To speed up paying it off might work against you.

You’re planning to move soon.

Moving — and buying a new house — is expensive. Depending on your situation, it’s likely better to have a little extra cash on hand for your next down payment, earnest money, and immediate home renovation projects than to have made a few extra payments on your old mortgage.

 

Apartment Therapy

Sarah Kuta