Image source: Getty Images
Although signing a mortgage is a pretty expensive prospect these days, just a few years ago, that wasn’t the case. In 2020 and 2021, mortgage lenders lowered their rates in response to the economic crisis fueled by the pandemic. Back then, with a good credit score, it wasn’t difficult to lock in a mortgage rate of 3% or lower on a 30-year loan. For perspective, rates are close to 7% today.
It’s common practice for homeowners to put extra money into their mortgages as they’re able to. Doing so allows them to pay off your home loan sooner and save money on interest. But if you signed your mortgage a few years ago and are sitting on a record-low interest rate, that’s a huge mistake.
Keep your money in savings
It’s one thing to try to pay off a credit card with an 18% APR as quickly as possible. Your balance could be costing you a lot of money by the day.
It even makes sense to pay off a 7% mortgage ahead of schedule. But if you’re sitting on a 3% mortgage rate or something in that vicinity, then you absolutely should not put any extra cash into your mortgage. Instead, you should leave that extra money in the bank.
These days, many high-yield savings accounts are paying 4% interest or more. So why would you pay extra into a 3% loan when you’re earning more from your savings than what your mortgage is costing you? It just doesn’t make sense.
Of course, eventually, savings account rates are likely to drop. But even once that happens to the point where the interest rate on your mortgage is higher than the interest rate you’re getting from your bank, it still doesn’t necessarily make sense to pay extra into your mortgage. A rate of 3% is a very low borrowing rate. And it’s a very affordable way to keep yourself more liquid.
Owning a home tends to go hand in hand with unexpected issues and repairs. It makes sense to keep extra cash in your savings account in case you wind up having to replace the roof, swap out your water heater, or address a termite problem.
And while it’s true that you could always borrow against your home equity for expenses like that, chances are, you’ll be looking at a higher interest rate to do so. So it’s better to be able to cover these costs outright with the money you’re keeping in savings.
It doesn’t always pay to follow traditional advice
Homeowners have long been advised to pump extra money into their mortgages to become debt-free sooner and save on interest. But this is one of those situations where an age-old piece of advice is no longer valid.
So if you signed your mortgage a few years back and locked in a 3% rate, or something close, keep your extra money in the bank instead of chipping away at a loan that’s not costing you very much in the way of interest.
Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2026
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
