A blog reader recently questioned the strategy of making one extra mortgage payment per year. This is a popular strategy recommended by financial planners because it can reduce a 30 year mortgage by 5 years and save tens of thousands of dollars in interest over the term of the loan. The reader, however, has a different strategy.

Our reader wants to know if it would be wiser to save that one extra mortgage payment into a savings account. Then, when the reader has built up a balance that equals his mortgage balance, he would use the money to pay off the mortgage.

Let’s compare the two options. Assuming a $200,000 mortgage for 30 years at 5.5%, in Option 1 (extra mortgage payment every year) the mortgage is paid off in 25 years and saves the reader $39,828 in interest.

In Option 2 (save the extra payment) the payment is put into some sort of savings or money market account. By my calculations that account would have to earn 5.80% to amass a balance large enough to pay the mortgage off in 25 years, the same time period as Option 1. The return would need to be higher to pay it off even sooner.

Can it be done? Perhaps, although with interest rates so low today (around 1-2%) they will have to rise to more than 10% for some period during the 30 years to give you an average of 6% over time. There are other factors that might also derail this plan. The reader may be tempted to dip into the account or may be unable to save the required yearly amount. Also income taxes will be owed on the interest earned.

So, while the reader has suggested a plan that makes sense and can definitely work, I am sticking with the tried-and-true strategy of recommending one extra mortgage payment per year.