Considering making an extra mortgage payment? A CFP on what to weigh first

If you’ve ever considered paying off your mortgage three, five or even 10 years earlier by making extra payments, you’re not alone. 

Ross Mannino, a financial adviser and managing director at Ameriprise Financial Services, told CNBC Select that clients come to him with this idea all of the time.

For some homeowners, like those with higher interest rates, a stocked retirement fund and no other debt, it may be the best move. But for many others, the decision could ultimately mean missing out on tens or hundreds of thousands in retirement savings or accruing more interest than necessary on bad debt. 

To help you avoid losses and maximize gains, we asked Mannino, a certified financial planner, what you should consider when deciding whether to make extra mortgage payments — and where you may want to think about putting that extra cash instead. While it’s crucial to talk to a financial adviser when contemplating many financial strategies, these five questions can help you determine whether this strategy may be right (or wrong) for you.

Make sure you have enough for monthly expenses, retirement savings and a robust emergency fund with three to six months’ worth of expenses. To help calculate your cash flow, you can download a free budgeting tool.

People who took out their home loans between 2018 and 2023, have interest rates that are “probably pretty darn low,” Mannino said. That could include rates in the 2% or 3% range.  But those who took out debt in the past three years may have rates as high as 8%. 

With inflation at 2.7%, it may make sense to put your money in a high-yield savings account or certificate of deposit where you can get a better rate of return if your rate is over 3%.

Making that extra mortgage payment “wouldn’t be the first place I would go to if you had a 3% mortgage,” Mannino said. “I think anything above 4.5% and 5%, it’s a discussion.” 

• There’s a good chance your mortgage is your cheapest debt, meaning it has the lowest rate. You’ll be accruing interest more slowly than you would on a credit card, which had an average rate of 20% as of February, or a student loan, which could have a rate as high as 18%.
• A mortgage is “good debt,” meaning the asset —which, in this case, is your home— is appreciating in value. Student loans and business loans are other forms of “good debt.” 

Before you pay off your “good debt,” you’ll want to get rid of “bad debt,” like credit cards or car loans, Mannino said. 

Bad debt is used to finance something that is losing value. The longer it takes for you to pay it off, the more you’ll be losing in interest payments to an asset that won’t give you anything in return down the road.

After that, if your goal is to become debt-free, you’ll want to pay off any good debt with higher interest rates before turning to your mortgage. 

Imagine you implemented this strategy between the ages of 30 and 60, retired at 65 and assumed an annual yield of 8% — the average between 2020 and 2025, according to Vanguard. 

• Extra yearly deposit: $1,847.15 (or $153.93 monthly)
• Total deposited: $55,414.50
• Total yield: $404,166.00

The homeowner in this example would net over three times as much in the long run by putting the extra cash in their retirement fund. 

One reason you may want to prioritize that extra mortgage payment is if you’re paying for private mortgage insurance (PMI). 

If homebuyers make a down payment of less than 20% of the home’s purchase price, they are typically required to maintain PMI until they have built enough equity to meet the 20% threshold. 

PMI ranges from 0.1% to 2.0% of the loan balance each year. On a $400,000 mortgage, that would be about $400 to $8,000 annually. 

That’s money that you will never get back, so you’ll want to get to that 20% equity mark as soon as possible by making extra mortgage payments — even if that money could have grown faster in a retirement or savings account than interest would on your mortgage. 

At CNBC Select, our mission is to deliver high-quality service journalism and comprehensive consumer advice to our readers, enabling them to make informed financial decisions. Every mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content independently of our commercial team and any outside third parties and pride ourselves on maintaining high journalistic standards.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Ross Mannino, a financial adviser and managing director at Ameriprise Financial Services’ advisory practice Wealth Planning Strategies, based in Greenwich, Connecticut. Mannino is a Certified Financial Planner (CFP) and an Accredited Portfolio Management Adviser (APMA), with decades of experience.

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