Prepay your mortgage only after you have an emergency fund and have cleared every debt with a higher interest rate, because a dollar always does the most good against your most expensive balance. A $1,000 prepayment on a 6.5% mortgage avoids about $65 of interest a year, while the same $1,000 on a 22% credit card avoids about $220 a year - more than three times the benefit. The mortgage is usually the last stop, not the first.
Where extra money should go first
Use this order to put every spare dollar where it earns the highest guaranteed return:
- A starter emergency fund. One month of expenses in cash keeps a surprise from forcing you onto a credit card. Size it with the emergency fund calculator.
- Your full employer 401(k) match. A match is an instant 50% to 100% return that no prepayment can beat. The 401(k) calculator shows the long-term effect of capturing it.
- High-interest debt. Credit cards and other double-digit balances cost far more than a mortgage. Knock these out with help from the debt payoff calculator.
- A full 3-6 month emergency fund. Top up the cash cushion before tying money up in the house, where it is hard to reach.
- Then choose: prepay the mortgage or invest. Compare your mortgage rate to a realistic after-tax investment return. If the rate is high, prepaying wins; if it is low and you are comfortable with risk, investing may grow more.
Once the mortgage reaches the top of your list, model the impact with the Extra Payment Mortgage Calculator.
The opportunity-cost comparison
Prepaying a mortgage is a guaranteed return equal to your interest rate. That is genuinely good - but only relative to your alternatives. Here is what $1,000 "earns" by being applied to different balances for one year:
| Where the $1,000 goes | Rate | Interest avoided per year |
|---|---|---|
| 22% credit card | 22% | $220 |
| Personal loan | 12% | $120 |
| Mortgage | 6.5% | $65 |
The math is blunt: clearing a 22% card is worth more than three times prepaying a 6.5% mortgage. This is why a cheap mortgage is the last debt to attack. Use the debt-to-income calculator to see your full picture before deciding.
Is prepaying worth it? A simple benchmark
A practical rule: prepay aggressively when your mortgage rate is higher than the after-tax return you could reasonably earn elsewhere, and lean toward investing when it is meaningfully lower. There is no rich vs poor answer - it depends on the rate gap and your tolerance for risk. A guaranteed 6.5% return from prepaying is excellent in a low-return environment and merely fine when safe yields are high. To compare your mortgage rate against potential growth, run an investment projection side by side with your extra payment numbers.
Recast vs refinance after a lump sum
If you do drop a large lump sum on the mortgage, your required monthly payment does not change on its own - you just finish sooner. To actually lower the monthly payment, you have two tools, and they are very different.
| Recast | Refinance | |
|---|---|---|
| What it does | Re-amortizes your loan over the remaining term after a lump sum | Replaces your loan with a new one, new rate and term |
| Interest rate | Stays the same | Changes to the current market rate |
| Typical cost | Small flat fee (often a few hundred dollars) | Closing costs, usually 2%-5% of the loan |
| Credit check / appraisal | Usually none | Yes |
| Best when | You have a lump sum and a good rate, and want a lower payment | Rates have dropped enough to beat closing costs |
Example: pay a $20,000 lump on a $350,000 loan at 6.5%, then recast the roughly $330,000 balance over the remaining term. Your payment falls from about $2,212.24 to about $2,085.82, a drop of roughly $126 a month, with no new rate and no big closing costs. A refinance only makes sense if a lower rate saves you more than its closing costs - check that with the refinance calculator.
Check for a prepayment penalty first
Before sending any large extra payment, confirm your loan has no prepayment penalty - a fee some lenders charge for paying off too much, too soon. Most modern conforming mortgages do not have them, but some do, and the penalty can wipe out part of your interest savings. Read your note and closing disclosure, or ask your servicer in writing. The Consumer Financial Protection Bureau explains how prepayment penalties work and where to find them in your loan documents.
Common mistakes to avoid
- Prepaying before you have any emergency fund. Money in the house is hard to get back; a job loss can force you to borrow at a worse rate.
- Skipping the 401(k) match to prepay. You are trading an instant 50%-100% match for a 6.5% return - a clear loss.
- Carrying a credit card balance while prepaying the mortgage. You are paying 22% to save 6.5%.
- Assuming a lump sum lowers your payment. It does not, unless you recast or refinance.
- Not labeling the payment "apply to principal." Otherwise it may just prepay your next bill.
Get the order right, confirm there is no penalty, and then size a sustainable extra payment with the extra payment calculator.
Try it yourself
Run your own numbers in the free Extra Payment Mortgage Calculator — instant, private, no sign-up.
Open the Extra Payment Mortgage Calculator →Frequently asked questions
- Should I pay off my mortgage early or invest?
- Pay off higher-interest debt and capture your full 401(k) match first, then compare your mortgage rate to a realistic after-tax investment return. If your mortgage rate is higher, prepaying wins as a guaranteed return; if it is meaningfully lower and you accept risk, investing may grow more. There is no one-size answer - it turns on the rate gap.
- Why pay off credit cards before prepaying my mortgage?
- Because a credit card costs far more than a mortgage, so a dollar does more good there. Applying $1,000 to a 22% card avoids about $220 of interest a year, versus about $65 on a 6.5% mortgage - more than three times the benefit. Clear the expensive debt first.
- Does a lump-sum payment lower my monthly mortgage payment?
- No - a lump sum shortens the term but keeps your required payment the same unless you recast or refinance. A recast re-amortizes the lower balance over the remaining term to cut the payment, while a refinance replaces the loan entirely with a new rate and term.
- What is the difference between a mortgage recast and a refinance?
- A recast keeps your existing rate and just re-amortizes the balance after a lump sum for a small fee, while a refinance replaces your loan with a new rate, term and 2%-5% closing costs. Recasting suits a good rate plus a lump sum; refinancing suits a meaningful rate drop. On a $350,000 loan, a $20,000 lump plus a recast lowers the payment by about $126 a month.
- What is a prepayment penalty and how do I check for one?
- A prepayment penalty is a fee some lenders charge for paying off a large share of your loan early. Most modern conforming mortgages do not have one, but you should confirm by reading your promissory note and closing disclosure, or asking your servicer in writing before sending a big extra payment.
- Is paying extra on a mortgage a good return?
- Yes - prepaying is a guaranteed, tax-considered return equal to your interest rate, which is strong when safe yields are low. The catch is opportunity cost: it is only the best move once you have an emergency fund, your employer match, and any higher-interest debt handled. At a 6.5% rate, that guaranteed return is solid but still loses to clearing a 22% card.
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