Are Mortgage Payments Considered Savings?

One of the most common questions homeowners have about personal finance is whether or not their mortgage payments can be seen as savings. This is a complicated subject, so it’s easy to see why there is confusion. In this article, we’ll explain if mortgage payments can be seen as savings, the pros and cons of doing so, and give you tips on how to make the most of your mortgage payments.

The Complexity of Mortgage Payments

A mortgage payment is typically comprised of four main components

• Part of the payment that goes toward paying off the loan balance is called principal.

• Interest is the cost of borrowing money for the mortgage. It is based on the interest rate and the amount of the loan that is still owed.

• Taxes – Money set aside for property taxes.

• Insurance – Funds allocated for homeowner’s insurance payments.

As you can see, only the principal portion of the payment goes toward paying off the actual amount borrowed. The rest covers ancillary costs associated with homeownership.

This is why it can be hard to tell if a mortgage payment counts as savings. Paying down the principal does build equity, but the other costs are ongoing.

The Case for Viewing Mortgage Payments as Savings

While mortgage payments contain more than just principal reduction, there are some compelling reasons why the payments could be considered savings:

• Forced savings – Having a mortgage pushes homeowners to “save” every month. Without the recurring payment, it’d be easier to overspend the freed up cash flow.

• Increases net worth – Principal payments directly build equity to increase the borrower’s overall net worth. Every extra dollar paid brings them closer to owning the asset outright.

• Future savings – Paying down principal faster lowers the interest owed over the life of the loan. This frees up cash flow down the road once the mortgage is paid off.

Essentially, viewing mortgage payments as savings depends on how you define the term. The principal portion does provide future benefits like the examples above.

Reasons Mortgage Payments May Not Qualify as Savings

On the other hand, there are some valid reasons why mortgage payments aren’t necessarily equivalent to active savings efforts:

• Interest and taxes – Majority of payment goes toward these expenses rather than principal reduction.

• No liquidity – Money put toward the mortgage can’t be accessed easily like cash savings.

• Opportunity cost – Extra payments mean less money for other goals like investing or short-term savings.

• Minimal control – Can’t voluntarily adjust mortgage payments like you can discretionary saving amounts.

Overall, a mortgage is still a liability that comes with obligatory costs. Viewing it completely as forced savings doesn’t account for these realities.

Tips for Making the Most of Your Mortgage

No matter which side you land on, there are smart ways to optimize your mortgage payments:

• Make biweekly payments instead of monthly to reduce interest and pay off the loan faster.

• Refinance to a lower rate if it substantially decreases your interest costs.

• Pay a little extra each month if affordable to chip away at the principal.

• Set up an automatic transfer to have added funds put toward principal every month.

• Use windfalls like bonuses or tax refunds to make one-time lump sum payments.

• If investing extra vs paying down mortgage, make sure to max out tax-advantaged retirement accounts first.

The bottom line is that while viewing mortgage payments as savings may be a bit simplistic, taking proven steps to pay off your home faster and reduce interest can lead to real financial benefits. As long as you maintain other critical savings as well, creating a mortgage strategy can be a savvy move.