Clark Howard Says Not to Hurry on Mortgages Under 5% — Do This First

Quick Read

• Clark Howard says mortgages below 5% do not need to be paid off early, but only after a Roth IRA and 401(k) are fully funded.

• His math only works if your cash is earning Treasury-bill-like returns of about 4.4%, not the national average CD rate of around 2%.

• Paying down the mortgage early can still make sense if your rate is above 5%, you rely on fixed retirement income, or you might otherwise spend the money unwisely.

Clark Howard recently devoted part of his podcast to a California caller who was weighing whether to pay off a mortgage early or invest the money instead. Howard has spent decades offering consumer-finance guidance on radio and podcasts.

His view was straightforward: “If you’ve got an interest rate below 5% on your mortgage, there’s no hurry to pay it off right now because what you can earn on savings is going to be roughly equivalent.”

He also laid out the order of priorities. A fully funded Roth IRA and a fully funded workplace retirement plan should come first, since “the tax advantages baked into them come before you prepay a mortgage.” For anyone close to retirement, this decision is difficult to reverse. Money sent to a lender becomes locked in the home, while cash left in a low-yield account can earn less than the loan costs.

Howard’s Priority Order Works, but the Math Has a Catch

The ranking itself makes sense. Extra principal gets you a return equal to your mortgage rate, guaranteed. An employer match or years of tax-free Roth growth can outperform that. The weaker part of Howard’s “roughly equivalent” argument is that it depends on your cash actually earning what Treasury bills pay.

At the moment, the 52-week Treasury bill yields about 4.4%, while the 26-week bill is around 4.3%. By comparison, the national average 12-month bank CD pays only about 1.8%, which means where you keep the cash matters almost as much as the mortgage rate.

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Put Howard’s example to work: a near-retiree has $20,000 in spare cash and a 4.5% mortgage. Using that money to reduce the loan saves about $900 in interest during the first year. The same $20,000 in a 52-week T-bill earns roughly $888 before taxes.

Taxes change the picture. T-bill interest is exempt from state income tax but still taxed federally. In Howard’s example, a 22% bracket lowers the after-tax return to about 3.5%, or around $693. Leaving the money in an average CD produces only about $352. Most retirees use the standard deduction, so mortgage interest often provides no tax benefit. That makes the full loan rate the real cost.

Your Mortgage Rate Determines Whether Waiting Pays Off

Now compare the same $20,000 with a 3.5% mortgage. Paying down the loan saves about $700 a year. The after-tax T-bill earns about $693. That is nearly a wash, and the T-bill money remains available for a roof repair or medical bill. At that rate, Howard’s case is strong.

At 4.5%, which is still below Howard’s 5% threshold, prepaying already comes out ahead of the after-tax yield. Howard said that once you move above his line, “every quarter point higher makes a stronger argument for prepaying on the mortgage.” Anyone who borrowed or refinanced above that level should pay close attention.

Why Retirement Accounts Come First

The IRS has set the 2026 401(k) deferral limit at $24,500, with an $8,000 catch-up contribution for workers age 50 and older.

Workers who turn 60 through 63 during the year can make a larger catch-up contribution of up to $11,250. The 2026 IRA contribution limit is $7,500.

An employer match gives you an immediate return that no mortgage rate can beat. Roth money also stays out of taxable income later. Under 26 U.S.C. § 402A(d)(1), qualified distributions from a designated Roth account are excluded from gross income. Roth IRA eligibility phases out at higher incomes under 26 U.S.C. § 408A(c)(3), so check your modified adjusted gross income first.

When Early Payoff Still Makes Sense

• Living on a fixed income. If your mortgage payment comes from a traditional 401(k), you have to withdraw more than the payment amount to cover taxes. Extra interest income can also make more of your Social Security benefits taxable, which is a known trade-off with CD interest. Eliminating the payment reduces taxable withdrawals.

• A higher-rate loan. Above Howard’s 5% threshold, the guaranteed savings from prepaying beat after-tax T-bill yields by an increasing margin with each quarter-point increase.

• Spending control. Howard’s own exception applies when you “would be really frivolous with the money otherwise.” Paying off the house keeps that money from drifting away.

Check These Figures Before Sending Extra Principal

1. Pay off credit cards first. The average card APR is 21%. A $20,000 balance costs about $4,238 a year, which is more than any mortgage prepayment will save.

2. Get the full 401(k) match, then fund a Roth IRA. If you are still working and have earned income, aim for the $7,500 limit, plus catch-up contributions if you qualify.

3. Calculate your after-tax cash yield. Multiply the T-bill yield by one minus your federal tax bracket, then compare the result with your mortgage rate. Move any money sitting in a below-average CD.

4. Let the spread decide. If your mortgage rate is within about half a point of your after-tax yield, keep the cash in T-bills where it remains accessible. If the mortgage rate is higher than that, send the extra money to principal.

In Howard’s view, a mortgage under 5% can wait, but only after retirement accounts are maxed out and spare cash is earning T-bill returns instead of the bank average.

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Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)