Extra to the mortgage versus a savings account

Suppose you have $200 a month that is not already spoken for. Two boring uses: send it as extra principal, or park it in savings. People treat this as a personality test. It is mostly arithmetic plus a liquidity question.

Extra principal

Every extra dollar reduces the balance that next month’s interest is calculated on. The “return” is your mortgage rate, after the fact, because that is the interest you stop paying. It is not a deposit you can pull out for a transmission. Prepaying a 6.95% loan is a 6.95% guaranteed reduction in future interest, ignoring taxes and any prepayment penalty.

Savings

A high-yield account pays an APY the bank can cut next week. The Fed’s 3.90% interest on reserves is what banks can earn at the Fed; your APY is a marketing decision. Interest is generally taxable in the year you receive it. The advantage is obvious in a cash crunch: the money is still there.

Do not skip the emergency fund

If extra principal would leave you with a thin checking account, the comparison is fake. A $200 extra payment that forces a 22% card balance next quarter is a bad trade. Fill a cash buffer first, then run the calculator on what is left.

The calculator shows remaining-term interest avoided versus a simple pretax year of savings interest. It does not know your tax bracket, your job risk, or whether you will move in three years. That is why this is not advice.

Default mortgage rate in the tool tracks Freddie Mac PMMS, week of September 17, 2026.