Should I Overpay Mortgage or Save? (2024)

FAQs

Should I Overpay Mortgage or Save? ›

As a general rule, if your mortgage rate is around the same, or higher than, your savings rate, then it makes sense to overpay. However, if your savings account has a higher interest rate than your mortgage, then it would be better to put any spare cash into that savings account and let it build interest.

KEY RULE: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay... That's because when it comes to savings, the reverse isn't automatically true.

It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.

When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).

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.

Meanwhile, overpayments of £100 a month for the remainder of the loan term would shave almost three years off the mortgage and reduce interest costs by £10,677. Alternatively, making a lump-sum payment of £10,000 would cut just under two years from the mortgage term, and save £11,400 in interest.

Make extra payments

A potentially simpler way for homeowners to pay off their homes quicker and save on interest charges is by making extra payments. There are three primary methods for making extra payments – pay extra each month, make a lump sum payment or switch to bi-weekly payments. Paying extra each month.

Should I overpay my mortgage when inflation is high? Generally speaking, overpaying your mortgage is always a good idea.

You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.

What does Dave Ramsey say about paying off your mortgage? ›

As Ramsey pointed out, paying more than the minimum amount due each month can cut down on the total amount of interest paid. This is because more of your hard-earned money is going toward the principal balance rather than the interest. Paying early and often also can lower the overall loan term.

Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment.

With $2,000 per month to spend on your mortgage payment, you are likely to qualify for a home with a purchase price between $250,000 to $300,000, said Matt Ward, a real estate agent in Nashville. Ward also points out that other financial factors will impact your home purchase budget.

Every overpayment you make means you pay less interest overall on the money you borrowed from us. Overpayments do one of two things to your mortgage balance, depending on the amount. These reduce your monthly payment. That means we recalculate your monthly payment but your term stays the same.

By reducing the length of time you spend making mortgage payments, you'll cut down the amount of interest you pay over the life of the loan. Depending on the loan amount, interest rate and original term, paying your mortgage off early could result in significant savings.

As you may know, making extra payments on your mortgage does NOT lower your monthly payment. Additional payments to the principal just help to shorten the length of the loan (since your payment is fixed).

“If you feel that you overpaid, try not to beat yourself up,” says Ali Wolf, chief economist of building consultancy Zonda. “Housing will go through cycles. … It still is a good long-term investment. “Your monthly payment is now fixed, you're paying to yourself, and in the long run, you're building equity,” she adds.