Should You Pay Extra on Your Mortgage in 2022?

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Don't make a decision about your home loan you end up regretting.

Key points

  • Paying extra on your mortgage can save you money on interest.
  • You can become debt-free faster if you make extra mortgage payments.
  • Despite the benefits, paying extra on a mortgage isn't right for everyone.

A mortgage is a huge debt for most people, and it can feel like a financial albatross as you pay your bill each month and look at the outstanding amount due. If you're tired of constantly sending money to the bank and spending on interest, you may be tempted to try to make extra mortgage payments in 2022 to get your loan paid down faster.

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

1. Do you have any other debt?

Most other kinds of debt are more expensive than mortgage loans. For example, credit card interest rates tend to be way higher than the rate you'd pay on a typical mortgage loan.

If you have any other kinds of debt you're paying interest on, it generally makes more sense to devote your extra money to paying off that debt rather than making extra mortgage payments.

Chances are good these other debt balances are lower, so you should be able to eliminate them 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 costlier debt before your cheaper mortgage loan.

2. What is your mortgage interest rate?

When you pay off debt early, your return on your investment (ROI) is the saved interest. As a result, you need to think about the interest rate you're paying on your home loan in order to calculate your ROI.

Most people have mortgage interest rates that are quite affordable. In fact, recently, rates were below 3% even on the most popular 30-year mortgage. While rates have crept up lately, they are still low by historical standards.

If your rate is relatively high, then you may want to think about refinancing to reduce it. This could be a better approach to saving money than paying extra on your mortgage, since even an "expensive" mortgage loan usually isn't going to have a rate much above 4%. That means your ROI is capped at a pretty low level when you're paying off mortgage debt ahead of schedule.

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

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

If paying extra on this loan means you won't be able to max out retirement accounts, earn your full employer match on your 401(k), or save for important big purchases, then you probably shouldn't be focused on making extra home loan payments.

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

4. Is your mortgage interest tax deductible?

Finally, if you itemize on your taxes, you should be able to deduct mortgage interest on loans up to $750,000. This means the government is subsidizing the interest you pay, which is another reason not to focus on paying down your mortgage debt ahead of schedule.

By considering the answers to these four key questions, you may decide paying extra on your mortgage in 2022 makes no sense at all.

Our Research Expert