Homeowners can save thousands of dollars in interest on their mortgages by making at least one extra payment toward the principal annually, but only about a quarter of borrowers do that, according to a recent analysis by one of the country’s largest home lenders.
The report by Rocket Mortgage, based on a review of additional payments made by its clients on about three million home loans between January 2021 and January 2026, found that the proportion of homeowners making extra payments varied, depending on when they took out their mortgage.
Homeowners who secured “ultralow” mortgage rates — the average interest rate was just above 3 percent during the Covid-19 pandemic — were more likely to make extra payments than those who borrowed in 2022 and after, when rates began climbing, Rocket found. Only about 20 percent of the borrowers with higher-rate mortgages were making extra payments. (The average rate on a 30-year fixed-rate mortgage was 6.71 percent as of Thursday, according to Freddie Mac.)
That may seem puzzling, since homeowners with higher rates have the most to save by paying down their principal balance early, said Bill Banfield, Rocket’s chief business officer. But people with lower-rate loans typically have smaller monthly payments, he said, freeing up more room in their budgets to put additional cash toward their loan balance.
The often bigger monthly housing costs for those with higher-rate loans, alongside rising everyday expenses, could make it harder for homeowners to pay more than the minimum — even though their savings would be greater.
Among borrowers who paid extra toward their debt, the average amounts added up to one extra monthly mortgage payment a year. That can have a “meaningful” impact, saving thousands of dollars in interest, Rocket found.
Borrowers tended to make extra payments early in the life of the mortgage, Mr. Banfield said, suggesting that their motivation to pay down debt may be strong at the time of initial borrowing but fade over time.
Here are some things to consider before making extra mortgage payments.
What is the benefit of making extra mortgage payments?
Making extra payments to reduce your loan principal shortens the time it takes to pay off your home loan, lowering the total amount of interest you pay.
Rocket found that a homeowner with a new 30-year fixed-rate mortgage of about $222,000 (the company’s median loan) at a rate of 6.67 percent could save about $68,000 in interest and pay off the loan almost six years early by making the equivalent of one extra monthly payment a year. (The example assumes a monthly principal and interest payment of about $1,425.)
Borrowers who can make two or more extra payments a year can trim 10 years off their loan, the report said.
Aside from the financial savings, paying down debt can have psychological value.
“It feels good to some people,” said Emily Jaffe, a certified financial planner and president of OFC Wealth Management in Millburn, N.J. (Just watch families celebrating their new status by making “debt-free screams” with the anti-debt crusader Dave Ramsey.)
But that doesn’t mean it’s always the smartest financial move.
How should I decide if making extra payments is wise?
Extra payments are an option only for people who can afford them, said Stephen Roll, research director at the Center for Social Development at Washington University in St. Louis.
While it may seem that someone who can afford to own a home would have some extra cash available, that’s not always the case. Dr. Roll said about 20 percent of homeowners lacked confidence in their ability to come up with $400 for an emergency expense.
He and other financial experts agree that you should consider making extra payments on your mortgage only after you’ve reached several other financial benchmarks.
“It’s often not the best place to start, if you have extra dollars,” Ms. Jaffe said.
Priorities should include setting aside savings — ideally, at least three months of living expenses, but $1,000 at a minimum — for unexpected bills. “You need to have the emergency fund first,” said Charles Hoff, a financial literacy counselor at DFCU Financial, a credit union with headquarters in Dearborn, Mich.
The financial experts also said that if you had a workplace retirement plan like a 401(k), contributing at least enough to get any employer match was important. And paying down any high-interest debt, such as credit card balances, offers a far better return than prepaying your mortgage.
“Put it to the highest-rate debt first,” said Jaime Eckels, a certified financial planner with Plante Moran in Auburn Hills, Mich. If you have a fixed 6 percent mortgage rate but are carrying significant credit card debt at 16 percent, “it’s almost a no-brainer to pay that higher card debt first,” she said.
Rates on student loans can vary but can also be significant, depending on the type of loan. Rates on federal student loans for undergraduates can’t, by law, go higher than 8.25 percent, but rates on private student loans, which are based on a borrower’s credit history, can rival credit card rates.
Federal student loans, however, may also offer options for loan forgiveness, including for borrowers who work in public service jobs. So you may not want to put your extra cash into paying student debt faster if you won’t eventually have to repay the full balance anyway, Ms. Eckels said.
What if I have a low rate on my mortgage?
If you have a very low interest rate on your mortgage — say, 3 percent — it may make more financial sense to save any extra cash in an account that offers a higher rate. “They have so many other better options,” Dr. Roll said.
Safe, federally insured high-yield savings accounts or certificates of deposit are paying around 3.5 to 4 percent or higher, while low-risk money market mutual funds are averaging 3.5 percent, according to Crane Data. And if you’re comfortable taking more risk, much higher returns — with the greater chance of losing money — are possible in the stock market.
Are there downsides to prepaying my mortgage?
If you put all your extra cash into your mortgage, you are essentially tying it up in an account that’s difficult to tap, Dr. Roll said. If you have a sudden financial mishap — a large medical bill or a job loss — you can’t easily get that money.
If you are just starting out with your first home, consider whether you are going to reap the long-term benefits of making extra mortgage payments. “A lot of people don’t stay in the same home,” Ms. Eckels said. “You probably won’t be in one house for 30 years. What is the rush?”
If you’re getting close to retirement, on the other hand, making extra payments on your mortgage can help align your expenses with your anticipated cash flow after you stop working. “For near-retirees, it’s much more attractive,” Dr. Roll said.
How do I make extra payments if I decide to do it?
Often, monthly loan statements have a line for making additional payments toward principal, Ms. Jaffe said. It’s generally smart to contact your lender or mortgage servicer before making extra payments. Details may depend on the type of loan, and you want to be sure your extra payment is correctly applied to your principal.
Another option may be making biweekly mortgage payments — essentially splitting your monthly payment into two — to pay down interest faster. Some borrowers link the payments to their paycheck cycle to help with budgeting. Again, check with your loan servicer for details.
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