Should you prioritize paying off student loans or mortgage?

If you’ve bought a home before paying off your student loans, you’re certainly not alone. According to a report from the National Association of REALTORS^®, nearly a quarter of home buyers and 37% of first-time home buyers still have student debt. It’s natural to ask yourself: Should I pay extra on my mortgage or my student loans? The answer will depend on the interest rate on your loans, the term on your mortgage, whether your debt has a forgiveness option, and other factors.

Read on to learn helpful information on how to decide which type of loan to prioritize.

How to make an extra payment on your mortgage

If you’re determined to make one or more accelerated loan payments, it’s important to know the steps involved:

1. Contact your loan servicer. Reach out by phone, email, or chat to a live person and confirm that any extra payment you send will be applied toward your principal – not to the next month’s scheduled payment. “This step often trips people up,” cautions Andrew Lokenauth, a personal finance expert. “Many loan servicers automatically apply extra funds as a future payment by default, which doesn’t reduce your interest the way a direct principal payment does. That distinction alone is worth a call.”
2. Verify that your account is current. Most lenders’ automated systems will not apply additional money toward your principal if any outstanding balance remains on the current month's bill, or if there are unpaid late fees or an escrow shortage.
3. Choose your extra payments and frequency. Once you’ve confirmed that your extra payment will be applied to your principal, decide how often and by how much your payments will increase. For example, you can opt to pay a one-time lump sum, one extra full payment per year (13 payments instead of 12), biweekly payments instead of monthly (26 half payments per year, which also equates to 13 full payments instead of 12), or a particular amount extra every month. You can submit the payments the same way you send your typical monthly payments.
4. Correctly label every extra payment. Ensure that your paper check or electronic payment indicates that the amount you are sending is to be applied to your principal. “Then, check your next account statement to confirm that it was applied correctly,” Lokenauth continues.

Amortization is the process of paying off your mortgage debt over time via a fixed repayment schedule. Your early payments mostly cover interest, while later payments primarily decrease your principal. When you make accelerated mortgage payments, you bypass this scheduled interest by directly lowering your outstanding balance against which the interest rate is calculated. In other words, you can significantly shorten the total interest cost over the life of your loan and shave years off your repayment timeline. Check out the Rocket Mortgage amortization calculator to help determine how much you can save.

To demonstrate how making accelerated mortgage loan payments can help you pay off your loan more quickly, pay less interest overall, and accelerate your amortization schedule, check out this hypothetical scenario (assuming you have a $300,000 loan at a 6.5% fixed interest rate) comparing a standard monthly payment to increased monthly payments:

How making extra payments affects your student loans

Making extra payments can affect your student loans differently, depending on whether they are federal or private loans:

• Federal student loans are issued by the U.S. government with fixed interest rates and borrower protections in place. Federal student loans don’t come with prepayment penalties, but some private student loans do. Some federal loans allow for a portion of your loan to be forgiven.  
• Private student loans are offered by banks or other lenders with varying rates and fewer repayment options. Private student loans typically do not offer loan forgiveness programs.

Like paying off a mortgage early, paying extra toward your student loan reduces your loan balance faster and the amount of interest you pay. Paying off your student loans early will also reduce the amount of debt you carry and lower your debt-to-income ratio, which could help you get a better interest rate on future loans. However, if you have high-interest credit card debt or not enough emergency savings stashed, it may not be worth it to pay off your student loans early.

To illustrate the impact of making accelerated student loan payments, take a look at this hypothetical example comparing a standard monthly payment versus an increased monthly payment:

By increasing your monthly payment by just $100, you can reduce your debt timeline by three years and eight months and decrease your total interest cost by approximately 34%. Every extra dollar you pay is directly applied to your principal balance, which aggressively lowers the amount of interest that can accrue in the following months.

Benefits of making extra payments on a mortgage

Making extra mortgage payments and paying off your mortgage early can come with considerable advantages, including:

• Building equity faster. Extra mortgage payments increase your home equity, which you can borrow to pay major expenses.
• Lower long-term interest. Paying off your mortgage early can save you significant interest, especially with long-term loans.
• Tax deductions. Mortgage interest is often tax-deductible, which can lower your overall tax liability. In contrast, student loan interest has a smaller deduction limit.
• Greater financial stability. Owning your home outright provides greater financial security and flexibility, reducing the risk of losing your property in the event of financial difficulties.
• Potential for better loan terms. Paying down your mortgage faster could improve your credit score and make it easier to refinance for better terms in the future.

“Paying off your mortgage faster almost always means lowering your costs and building equity more quickly. It can also be a major psychological win because paying down a mortgage can be freeing – it means stability and security,” says Bobbi Rebell, a Certified Financial Planner. “The one key downside is liquidity and the potential investment upside that you lose when the cash is tied up in your home. Making extra payments means that cash is not available for things like an emergency fund or investable options that could, over time, produce better financial returns than putting money into your home.”

When to prioritize making extra mortgage payments

Here are some cases where it can make sense to pay extra toward your mortgage instead of your student loans:

• Your mortgage has a higher interest rate than your student loans.
• You want to own your home outright sooner.
• You want to build equity faster to eliminate private mortgage insurance.
• You’ve maxed out your retirement contributions.
• You qualify for at least some student loan forgiveness.

“You should prioritize the loan that is costing your household more or creating more risk, but don’t judge based on interest rate alone,” suggests Vaughan. “If your mortgage rate is high, your household already has strong cash reserves, and your other debts are low or manageable, making accelerated mortgage payments can make more sense.”

When to prioritize making extra student loan payments

If some of the following scenarios apply to you, it can be a good idea to make extra student loan payments instead of accelerated mortgage payments:

• Your student loans have higher interest rates than your mortgage.
• You don’t qualify for student loan forgiveness.
• You don’t qualify for income-based repayment benefits.
• Paying off your student loans can help improve your cash flow and reduce your debt-to-income ratio.
• You want to save on interest.

“Prioritize paying off your student loans first when the rate is high – that means 6% to 7% or above,” Lokenauth says. “High-rate debt destroys wealth fast. I carried student debt at 8% when I was younger, and kept telling myself I would get to it later. That delay cost me thousands in compounding interest. You want to attack your most expensive debt first.”

Should I pay off my student loans or save for a house?

What if you don’t own a home just yet, but want to buy one soon? If so, you’ll need to save for a down payment. Problem is, you wouldn’t be able to pay off your student loans as quickly. So which should you prioritize: saving for a house or paying off your student loans?

Here’s a handy chart that can help you make a more informed decision:

“You should clear the debt that is either more expensive or less strategic first,” says Vaughan. “A mortgage loan is usually longer-term and secured by an appreciating asset. Student loan debt, on the other hand, often carries less flexibility unless you have a clear federal repayment or forgiveness strategy. But before making extra payments on either debt, ensure you have emergency reserves, understand if any student loan forgiveness path applies, and confirm that the extra payments are actually being applied properly toward your principal.”

FAQ about loan repayments

Now, let’s look at some frequently asked questions about paying off your mortgage and student loans.

How can I pay off my student loans fast?

If you’re looking to wipe out your student loan debt, here are some strategies to help you pay down your student loans faster:

• Make extra payments when you can.
• Commit to paying a specific amount more than the minimum each month.
• Consider biweekly payments or 13 payments year versus 12.
• Refinance if you have good credit and private loans are available.
• See if your employer has a student loan repayment program as a benefit.

Can I roll my student loans into a mortgage payment?

One way to roll your student loans into your mortgage is with a cash-out refinance. With this option, you replace your mortgage with a larger mortgage and withdraw the difference to pay off your student loans. If your student loans have a high interest rate, consolidating them with a single payment at a lower interest rate can be a way to manage your debt more effectively.

One way to do this is through Fannie Mae’s Student Loan Cash-Out Refinance Option. This program is designed to help homeowners pay off their student debt by refinancing to a loan with more favorable terms than a typical cash-out refinance.

Is it better to have savings or pay off student loans?

Before you consider making extra student loan payments, make sure you have enough of an emergency savings fund. It’s recommended to salt away at least 3 to 6 months’ worth of living expenses to cover unexpected costs like job loss, medical bills, or home repairs.

If your student loan interest rate is low, you may consider instead contributing to a high-yield savings account or retirement account. However, if you have sufficient savings in the bank and your student loan interest rate is high, it makes sense to prioritize paying off your student debt.

What student loans should I pay off first?

If you have private student loans, it’s usually best to pay those off first. Private student loans typically carry higher interest rates and offer fewer borrower protections compared to federal student loans.

The bottom line: Prioritizing repaying student loans vs. mortgage

Should I pay extra toward my mortgage or federal student loans, you wonder? Whether or not to prioritize repaying your student loans or mortgage will depend on the terms of your debt. Ultimately, if your student loan interest rate is low and your mortgage term is long, extra mortgage payments may save you more in the long run. However, if your student loans have high interest and no forgiveness options, tackling them first may be the smarter move.

Once you feel like you’re in a good place with your finances, you can get a head start on the home buying process. Start your mortgage application with Rocket Mortgage now.

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