Extra Mortgage Payments at 7.4%: Pay Down the Loan or Invest?

Freddie Mac's weekly survey put the average 30-year fixed mortgage at 7.40% on October 8, 2026 — up from 7.28% a week earlier, from 6.30% a year ago, and the highest since November 2023. It was the seventh weekly rise in a row, pulled up by a 10-year Treasury yield that averaged 5.28% that week.

That changes an old question for anyone with spare money each month. When a mortgage cost 3%, almost anything beat paying it down early. At 7.40%, every extra dollar you send to principal earns the loan's rate — guaranteed, with no market risk — and the best savings accounts pay about 4.5%. This guide puts numbers on both sides for a $400,000, 30-year loan at 7.40%: what $100, $200 or $500 a month extra saves, what a one-off $10,000 does, and when investing the same money comes out ahead.

Who this is for: homeowners and buyers with a fixed-rate mortgage near today's rates who have money left after the bills. What it does not cover: FHA and VA loans in detail (their insurance rules differ), adjustable-rate mortgages after their reset, and state income taxes. If your mortgage is at 3%, the answer below flips — the same arithmetic, a much lower bar for investing.

The baselineWhat $400,000 at 7.40% costs

The required payment is $2,769.52 a month in principal and interest. Over 30 years that adds up to $597,026 of interest — more than the loan itself. In the first year, $29,474 of the $33,234 you pay goes to interest; only about $3,760 reduces the balance.

That front-loading is why early extra payments are so powerful: a dollar of principal removed in year one stops charging 7.40% for the rest of the loan, every month, compounding.

Extra every monthWhat $100, $200 and $500 save

Each row adds the same amount to every payment from the first one, and the bank uses it to shorten the loan (the payment stays the same, the end date moves closer). That is the default for extra principal at almost every US servicer.

The ratio is the point: $200 a month — $57,800 in total — removes $139,238 of interest and the last 71 payments. That is not a return you can quote as a percentage of the $57,800, because the money is paid in over 24 years; measured properly, it earns exactly the loan's rate, 7.40% a year. The next sections compare that rate with the alternatives.

One-off $10,000Shorter term or lower payment

A bonus or a tax refund paid once works the same way, and here the choice of what the bank does with it matters a lot.

A recast is the formal name for the second option: the servicer re-amortizes the lower balance over the original end date. Not every lender offers it, most require a minimum lump sum, and some charge a fee for it — call your servicer before sending the money. Without a recast, a lump sum simply shortens the term.

Pay down or investA guaranteed 7.40% against the alternatives

To compare fairly, take the same $200 a month for the same 30 years and follow two households:

• A pays $200 extra until the loan is gone in December 2050, then invests the whole freed-up payment — $2,969.52 a month — for the 71 months that are left.
• B pays the mortgage on schedule and invests $200 a month from the start.

Both spend exactly the same each month for 30 years. The question is who has more at the end, and that depends only on what the invested money earns after tax.

The break-even sits almost exactly at 7.40% — the loan's own rate. Below it, paying down wins; above it, investing does. So the honest comparison is:

• Against cash and bonds, paying down wins easily. A savings account at 4.50% keeps 3.51% after a 22% federal tax; a Treasury yield of 5.28% keeps 4.12% (Treasury interest is free of state tax, which this ignores in their favour). Neither comes near 7.40%. If your extra money currently sits in savings beyond your emergency fund, what high-yield savings actually pay after the Fed hike and the 10-year Treasury at 5.31% show why it is losing to your own mortgage.
• Against stocks, it is a bet, not a calculation. US stocks have averaged roughly 10% a year over long periods before tax, but not in every 20-year window, and not without falls of 30% or more along the way. Investing beats prepaying only if stocks clear 7.40% after tax over your horizon. Prepaying earns 7.40% with certainty.

Plenty of people split the money — some to principal for the certain return, some to a broad index fund for the upside — and that is a reasonable answer to an uncertain question.

TaxesThe deduction counts only if you itemize

Mortgage interest is deductible, which lowers its real cost — but only if you itemize instead of taking the standard deduction, which for 2026 is $16,100 for a single filer and $32,200 for a married couple filing jointly. Interest is deductible on up to $750,000 of mortgage debt.

On this loan, year-one interest is $29,474. A married couple paying $12,000 in state and local taxes (deductible up to the 2026 cap of $40,400) and giving $2,000 to charity would itemize $43,474, well above $32,200. For them, each extra dollar of interest is deductible: at a 22% bracket the loan really costs 7.40% × 0.78 = 5.77%, at 24% about 5.62%.

That lowers the bar for investing — stocks now need to beat about 5.8% after tax instead of 7.40% — but it does not change the result against savings or Treasuries, which still keep only 3.5–4.1%. And it fades: as the balance falls, so does the interest. With the standard deduction at today's level, this couple stops itemizing around 2045, and sooner as the deduction rises with inflation. A single filer or a smaller loan crosses that line much earlier.

Before you prepayFour things that come first

Extra principal is a good use of money only after these are covered, roughly in this order:

1. 01An emergency fund. Money sent to the mortgage cannot be taken back without selling or borrowing against the house. Three to six months of expenses stays in cash — how long your savings would last is the way to size it.
2. 02The full 401(k) match. A 50% or 100% match is an instant return no mortgage can beat.
3. 03Expensive debt. Credit cards charge over 22% on average; every dollar there saves three times what it saves on the mortgage.
4. 04A check for a prepayment penalty. On most US loans there is none. Federal ability-to-repay rules allow one only on a fixed-rate qualified mortgage that is not higher-priced, only in the first three years, and capped at 2% of the amount prepaid in years one and two and 1% in year three — and the lender must also have offered you a loan without one. Page one of your Loan Estimate and Closing Disclosure has a "Prepayment Penalty" line that answers yes or no.

Mortgage insuranceA bonus if you put less than 20% down

Say the house cost $445,000 and the $400,000 loan is about 90% of its value, so you pay private mortgage insurance (PMI). Under the Homeowners Protection Act you can ask the lender to cancel PMI once the balance reaches 80% of the original value — $356,000 here — counting your actual payments, as long as your payment record is good. Extra principal gets you there sooner:

If PMI costs $150 a month (it varies with credit score and down payment), ending it 34 months early is another $5,100 on top of the interest saved. FHA mortgage insurance follows different rules and usually cannot be cancelled this way.

Track the planFollowing it in the Loan & Mortgage Tracker

A table in an article shows one loan on one day. The Loan & Mortgage Tracker follows yours: enter the contract (or import a statement), and every payment you log is checked against it.

• Your overpayment plan. In the Planner, add an amount on top of every payment from a date — and, if you like, until a date — or a one-off sum on a future date, such as next spring's bonus. Each says whether the bank shortens the term or lowers the payment. The forecast follows the plan everywhere and shows the payoff date with the plan and without it, and the interest it saves. Nothing counts as paid until you record the actual payment.
• What if, and paid off by a date. Try any extra amount or lump sum and see the new payoff date and interest; or pick the year you want to be done and the tracker finds the smallest extra each month that gets you there.
• PMI dates. It shows when your real balance reaches 80% of the original value — the day to call the lender — and when the original schedule reaches 78%.
• Tax estimate. For a dollar mortgage, the interest × your marginal rate, with the standard deduction shown to compare.
• Stress and inflation views. For a variable rate, what +1 to +3 points would do; and the payments still ahead in today's money.
• A PDF schedule of every payment made and still to come, and CSV export — both free.

To test a single number first, the Mortgage Calculator shows a payment and its amortization; if rates fall later, the Refinance Calculator shows when refinancing pays back — and the cost of the October rate spike shows where today's 7.40% came from.

Where these numbers come fromThe model and its limits

Rates are from Freddie Mac's Primary Mortgage Market Survey of October 8, 2026 (30-year 7.40%, prior week 7.28%, year ago 6.30%; 15-year 6.73%), as reported with the release; the 10-year Treasury figure is that week's average of 5.28% cited in the same coverage. The 4.50% savings rate is the top of the advertised range for high-yield accounts in early October 2026; most pay less.

Every loan figure comes from the same engine as the Loan & Mortgage Tracker: a $400,000, 30-year, fixed 7.40% loan, monthly interest, first payment December 1, 2026, extras applied to principal with each payment. The $2,769.52 payment matches the standard amortization formula to the cent. Payments are principal and interest only — property tax, insurance and PMI are left out unless named.

The pay-down-or-invest table assumes the same after-tax return every year, monthly contributions, a 22% federal bracket and no state tax; it ignores inflation, which affects both sides equally. Two simplifications favour investing: Treasury interest is in fact free of state tax, and savings rates are unlikely to stay at 4.50% for 30 years. One favours paying down: it assumes you do not itemize. The stock returns are assumptions, not forecasts. The PMI cost of $150 a month is an example, not a quote. None of this is tax or investment advice.

FAQFrequently asked questions

Is it better to pay extra on a 7% mortgage or invest?

Paying extra earns the loan's rate with no risk, so it beats savings accounts and Treasuries at today's yields after tax. Investing in stocks wins only if they return more than the mortgage rate after tax over your horizon — about 7.4% if you take the standard deduction, about 5.8% if you itemize at 22%. Many people split the money.

How much does an extra $200 a month save on a $400,000 mortgage?

At 7.40% for 30 years, $200 a month from the start saves about $139,238 of interest and pays the loan off in 289 months instead of 360 — almost six years early. You put in $57,800 of extra principal to get there.

Is it better to shorten the term or lower the payment?

Shortening the term saves far more interest: a $10,000 lump sum saves $73,490 that way, against $14,924 if the payment is recast lower. Lowering the payment helps only if monthly cash flow is the problem.

Do extra mortgage payments remove PMI sooner?

Yes, if you request it. You can ask the lender to cancel PMI when your actual balance reaches 80% of the home's original value, and extra payments get you there sooner. Automatic termination at 78% follows the original schedule and does not move.

Is there a penalty for paying off a mortgage early?

Usually not. Federal rules allow a prepayment penalty only on certain fixed-rate qualified mortgages, only in the first three years, and capped at 2% in the first two years and 1% in the third. Your Loan Estimate or Closing Disclosure says whether your loan has one.