Should You Pay Extra Toward Your Mortgage or Save Money in a CD?

Let's say that you have some money that you aren't going to need for a while. Maybe you got a tax refund and don't have any immediate need for the money, or maybe you got a bonus at work.

There are a lot of things you could do with the money, but you've narrowed it down to two choices: Pay extra toward your mortgage or save the money in a CD while CD interest rates are still high. But which is the smarter financial move?

The mathematical case

If you're just looking at it from a dollars-and-cents point of view, there's an easy question to ask yourself. If the rate you can get from a CD is higher than the interest rate you're paying on the mortgage, then mathematically speaking, you're better off with the CD.

For example, my mortgage that I obtained in 2021 has a 3.125% interest rate. If I can get a 5% yield from a 1-year CD, that is the better financial move from a mathematical standpoint. By putting money in a CD, the interest income you get would exceed the interest savings of an additional mortgage payment.

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On the other hand, if your mortgage rate is 6% or 7%, the opposite would be the case. By leaving money in a CD instead of paying extra towards your mortgage, you'd be setting yourself up to lose money over time.

Other things to consider

Of course, math isn't everything. There are a few other factors to consider before deciding whether to pay off mortgage debt or save/invest your extra money.

Emergency savings

You'll pay an early withdrawal penalty if you take money from a CD early, but if you use the money to pay down your mortgage, you'd need to refinance or get a home equity loan to access that cash again. I can virtually guarantee that the origination fee on either of these options will be far greater than a CD penalty, so leaving the money in a CD gives you financial flexibility.

Debt aversion

There's also the psychological factor to consider. Many people simply sleep more soundly knowing they don't owe anyone money. If becoming completely debt free is a major life goal of yours, it doesn't really matter what the mathematics are telling you. And even if the difference in rates is substantial, it's not a bad financial decision to pay down debt.

Are either of these a great option?

Finally, it doesn't make good financial sense to pay down your mortgage or put extra money into a CD if you have other, higher-interest debts. If you owe money on credit cards or have an auto loan with an interest rate substantially higher than you could get from a CD, that should be the priority.

The bottom line

Like most personal finance concepts, there isn't a perfect option. In some cases, saving your extra money in a CD or high-yield savings account instead of paying extra toward your mortgage can be a smart move. In other situations, reducing your debt as aggressively as possible could be the better way to go.

The bottom line is that it depends on your financial situation, your goals, and your comfort level with debt.