"I've saved $30K — should I pay down my mortgage early?" It's the classic dilemma for homeowners. Pay early and you might miss better investments; hold on and you watch interest pile up. Here are the three methods, plus the formula that decides whether it's worth it.
Three Ways to Prepay
- Shorten the term: same monthly payment, shorter period — saves the most interest
- Lower the payment: same term, smaller monthly bill — eases cash flow, saves less
- Pay it off: clear the balance in one go (check prepayment penalties first)
Example: $30K Prepayment in Year 5
$150K mortgage, 30 years, 4.0% (amortized). After 5 years, pay an extra $30K:
| Approach | Effect |
|---|---|
| Do nothing | ≈ $108K total interest over the full term |
| Shorten term | Interest drops sharply — often $15K+ saved |
| Lower payment | Smaller monthly bill, less interest saved |
Exact numbers depend on remaining principal, rate, and timing — run both modes in the loan calculator and see the gap.
The Core Decision Rule
Prepaying means trading cash for a risk-free return equal to your mortgage rate:
Your long-term return < your mortgage rate → prepay
Your long-term return > your mortgage rate → invest instead
- At a 4.0% mortgage, if your spare cash only earns 2% in a savings account, prepaying earns you a safe 2% spread
- If you can consistently earn 6%+, keep the cash investing — run the compound interest calculator to see the gap
Who Should / Shouldn't Prepay
Should: risk-averse savers whose cash underperforms the mortgage rate; holders of high-rate loans (5%+); retirees wanting to shed the payment.
Shouldn't: low-rate government loans (≈3.1%); anyone who would drain emergency reserves (keep 6 months of living costs); investors with a proven higher-return strategy.
Before You Do It
- Penalty check: some banks charge prepayment fees within 1-3 years
- Tax deduction: mortgage interest may be tax-deductible — paying off eliminates it
- Keep reserves: never put every dollar into the mortgage
Bottom Line
Prepaying isn't "saving money by paying" — it's trading cash for a stable interest spread. Run the three methods in the loan calculator, then compare against your investment return with the compound interest calculator. The answer will be obvious.