If your savings account or high-yield savings account (HYSA) earns less than your mortgage interest rate, paying down your mortgage is mathematically the better choice. With HYSAs currently paying 4-5% and mortgage rates at 6.5%+, the guaranteed return from paying down debt beats the savings yield.
However, liquidity matters. You should always maintain an emergency fund of 3-6 months of expenses in a readily accessible account before making extra mortgage payments. Once you put extra money into your home equity, it is not easy to get back out without refinancing or selling.
The decision comes down to your after-tax comparison. Mortgage interest may be tax-deductible if you itemize, which reduces the effective rate. Savings interest is taxable, which reduces the effective yield. Compare after-tax, after-fee numbers for an apples-to-apples look.
Patrick's Take
I tell my clients: if your mortgage rate is 6.5% and your savings account is paying 4.5%, you are losing 2% by keeping the cash in the bank instead of putting it toward your mortgage. That is a guaranteed loss. But do not empty your emergency fund. Keep 3-6 months of expenses liquid. Anything above that? Throw it at the mortgage. The peace of mind of owning your home free and clear is worth something too.
Patrick Kevin Fagan
Loan Officer and Realtor, AXEN Realty LLC
Not Sure Where to Put Your Extra Cash?
Patrick can help you evaluate your specific situation and decide whether paying down your mortgage or saving makes more sense.