Pay Off Mortgage or Build a Cash Buffer in 2025?

The big myth: wiping out your mortgage always beats cash

Look, I get it. Killing the mortgage feels amazing. It’s clean. It’s progress you can point to at dinner. But here’s the thing: in 2025, liquidity and optionality often matter more than squeezing a tiny bit of interest savings. I’ve seen too many folks become “house rich, cash poor,” and it’s not fun when the water heater dies the same week your employer trims headcount. Honestly, I wasn’t sure about this either early in my career, pay down debt sounded like the responsible path 100% of the time. Then I watched clients with beautiful equity get hammered by, you know, life.

Two quick data points to ground this. First, a lot of people are still sitting on very low mortgage rates from the pandemic era. Redfin estimated in 2024 that roughly 60% of mortgage borrowers had rates under 4%, and about 23% were under 3%. Prepaying a 3% fixed loan is basically earning 3% (before tax effects) on those extra dollars. Second, the Federal Reserve’s 2024 Survey of Household Economics and Decisionmaking reported that about 37% of adults would struggle to cover a $400 emergency without borrowing or selling something. Those two facts sitting side by side tell you a lot: cheap debt is common, and liquidity gaps are, too.

Being equity-rich doesn’t pay for a cracked furnace on a Friday night. Cash does.

When cash is tight, the all-debt-reduction mindset can backfire. You end up leaning on high-rate credit cards for surprise expenses, paying late fees, or tapping a HELOC at the worst possible time. And HELOCs aren’t guaranteed to be there when you need them; banks can freeze or cut lines during stress. I watched a neighbor (this was back in 2020 if I remember correctly ) prepay aggressively, then face a sudden income hit and a roof leak. They had to put repairs on a card at 20% APR. The math turned ugly in about five minutes.

House rich, cash poor = avoidable stress. It shows up as overdrafts, missed autopays, and the kind of money anxiety that wrecks sleep. The Fed’s 2024 SHED also noted that emergency expenses are common, medical, auto, home. When you’ve shoved every extra dollar into the mortgage, you’re forced to pay for those with expensive money later. And that’s before we talk about liquidity penalties: transaction costs to tap home equity, time delays, appraisal hassles, and closing fees. Prepaying can be a one-way door when your life needs two-way exits.

In real market terms, this year’s rate picture is still, let’s say, not cheap. Borrowing costs for unsecured credit remain elevated relative to those 2020-2021 days. Meanwhile, keeping a sensible cash buffer means you can avoid high-rate debt, grab opportunities, and negotiate from strength. I think people underestimate the value of being able to say “no” to bad financing because their emergency fund is intact.

Anyway, here’s what we’ll cover next, in plain English:

• Why the all-debt-reduction mindset can backfire when cash is tight, even if your mortgage rate isn’t terrible.
• How being “house rich, cash poor” creates stress and fees you don’t need, and how I’ve seen it play out in real households.
• When keeping cash on hand actually improves long term outcomes, especially if your fixed mortgage is in the 2.5%-4% range and your alternative is costly credit.

Actually, let me rephrase that: we’re not saying “never prepay.” We’re saying the first dollars should often go to a real cash buffer, because surprises don’t care that you shaved six months off your amortization schedule. And in 2025, with many people still carrying low fixed mortgages while facing higher short-term borrowing costs, liquidity isn’t a luxury, it’s strategy.

Run the math the right way: after-tax vs after-tax

Here’s the thing: keep it mechanical. No vibes. Compare two after-tax numbers and then think about liquidity. I’m still figuring this out myself in a couple edge cases, but the core is simple.

1. Compute your after-tax mortgage cost. Start with your rate and adjust for any actual tax benefit. Formula: mortgage rate × (1 − tax benefit). If you don’t itemize, your tax benefit is effectively 0, so your after-tax mortgage rate is just your stated rate. After the 2017 tax law boosted the standard deduction and capped SALT at $10,000, most households stopped itemizing. IRS data since 2018 show roughly 10%-12% of filers itemize, versus ~30% before the law. In 2024, the standard deduction was $29,200 (MFJ), $14,600 (Single), $21,900 (HOH); 2025 stays high and the $10k SALT cap remains. Translation: unless you’re itemizing, mortgage interest isn’t reducing your taxes in 2025.
2. Compute your after-tax cash yield. Look at what your taxable cash earns: savings accounts or T‑bills. As of September 2025, 3-6 month T‑bills are around ~5% give or take, and top online savings are in the high 4s to low 5s. After-tax yield is cash yield × (1 − your marginal tax rate). Example: 5.0% T‑bill in a taxable account at a 24% federal bracket ≈ 3.8% after tax (ignoring state taxes; T‑bills are state-tax free, which occassionally helps a lot in high-tax states). Savings interest is taxable by both federal and state.
3. Adjust for liquidity value. Cash isn’t just a yield. It prevents fees and stress. You know, avoiding a 22% credit card balance during a roof leak is a real return. Mechanically, I haircut cash’s yield less than I haircut mortgage rates because cash protects you. Personally, I want the mortgage’s after-tax cost to beat my after-tax cash yield by a meaningful margin (say 0.5%-1.0%) before I prepay, otherwise I keep the buffer.

Decision rule (no emotions):

• If after-tax mortgage rate > after-tax cash yield + liquidity margin, prepay looks better, unless it would drain your safety buffer.
• If after-tax mortgage rate ≤ after-tax cash yield + margin, keep the cash, keep earning, and reassess later this year.

Examples:

• No itemizing, 3.25% fixed mortgage from 2021. After-tax mortgage cost ≈ 3.25%. Your T‑bill ladder yields 5.0% pre-tax; at 24% federal, after-tax is ~3.8%. Add a 0.75% liquidity premium and you’re effectively comparing 3.25% vs 3.05%. Cash wins narrowly. I wouldn’t prepay until my liquid reserves feel overbuilt.
• Itemizing at 32% marginal federal and real incremental deductibility: 6.50% mortgage × (1 − 0.32) ≈ 4.42%. If your after-tax T‑bill yield is ~3.4% (5.0% × (1 − 0.32)), the spread is about 1.0%. Prepaying makes sense, after your emergency fund is funded.

Critical reminders for 2025: mortgage interest only helps if you itemize; the $10k SALT cap and higher standard deduction are still in effect this year. Many homeowners won’t see any tax benefit from interest, which means their mortgage cost is the sticker rate. This might be getting complicated, but once you set your inputs (rate, bracket, itemize or not, local taxes), the calculator is repeatable. And yeah, I know it’s not perfect (real life rarely is ) but this framework keeps you from, basically, guessing.

Liquidity is a feature, not a bug

Liquidity is a feature, not a bug. Here’s the thing: an emergency buffer isn’t “lazy money.” It’s the cash that keeps everything else working. Look, I get it, it’s tempting to throw every extra dollar at the mortgage or into the market, because that feels proactive. But cash is what keeps you from making expensive decisions when life throws a flat tire, a roof leak, or a job hiccup at you.

Target-wise, a good rule of thumb still holds: 3-6 months of core expenses for most households. If you’re a single-income homeowner, have variable or cyclical income, or depend on bonus/commission-heavy pay, I’d push to 6-12 months. Not forever, not as a lifestyle, just as your baseline buffer. After that, great, build the investable pile or prepay principal. But without the buffer, you’re one surprise away from, you know, raiding investments or swiping a card at a brutal rate.

Why brutal? Because the math is lopsided. Federal Reserve data shows the average APR on interest-accruing credit card accounts was about 22.8% in Q4 2024, and it’s still north of 20% this year. You can’t reliably earn that in the market without taking big risk. So cash that stops a 20%+ balance from forming is, in a weird way, “earning” you 20% by preventing the debt in the first place. That’s real.

Cash also keeps you invested. During volatile stretches, forced selling is the killer. In 2022, plenty of folks sold stocks after a 20%+ drawdown because they needed cash, not because they lost faith. That’s what pros call “sequence risk” (actually, let me rephrase that ) it’s just getting hit with bad market returns at the exact moment you need money. A buffer buys you time to wait for a better exit, or, better yet, avoid selling altogether.

“But I’ve got a HELOC.” Great tool, I like them. I use one occassionally for timing big expenses. But don’t treat it as guaranteed liquidity. Banks can freeze or cut HELOC limits during stress, they did it in 2008 and we saw selective pullbacks again during early 2020. If your line gets trimmed the same week your roof decides it’s a sieve, you’re back to the card. The HELOC is a supplement, not the emergency fund.

And here’s where 2025 actually helps: cash isn’t dead money. High-yield savings accounts and short T-bills have been paying roughly 4-5% this year (give or take as the Fed path evolves). No, that’s not guaranteed forever, and yes inflation nibbles, but it’s real carry (sorry, jargon ) it just means your cash is earning something meaningful while it waits for a job to do.

I’ll give you a quick personal one: earlier this year a close friend had two surprises in the same month, a transmission failure and a dental surgery deposit. Not glamorous, not Instagram-worthy. The buffer covered both. No selling ETFs at a bad print, no 24.99% APR balance haunting them for six months. We had coffee, they vented, then they slept fine. Sometimes that’s the whole point.

Think of cash like an insurance policy that also earns a yield. Imperfect analogy, sure, but you get it. You “pay” in the sense that your upside is capped, and in exchange you avoid catastrophic, high-interest detours at the worst possible time.

• Baseline: 3-6 months of expenses; 6-12 months if single-income, homeowner, or income is volatile.
• Debt avoidance: Credit card APRs have been ~20%+ (Fed data showed ~22.8% in Q4 2024), so preventing balances is a huge win.
• Stay invested: Cash stops forced selling in down markets.
• HELOCs help, but lines can be frozen or cut when you most need them.

So, build the buffer first. Then improve the rest.

2025 rate reality: who should favor cash, who should prepay

Context really matters right now. A lot of owners still carry those unicorn loans from 2020-2021, while folks who bought or refi’d in 2023-2024 are staring at rates that, you know, aren’t exactly inspiring. That split changes the math.

If you’ve got a pandemic-era mortgage (sub-3% to ~3.5%): You probably benefit more from building a bigger cash buffer and investing before throwing extra at the mortgage. Freddie Mac’s Primary Mortgage Market Survey showed record lows around 2.65% in January 2021 for 30-year fixed loans, and plenty of borrowers locked in between 2.75% and 3.5% in 2020-2021. When your after-tax mortgage rate is that low, the hurdle for prepaying is high. Even in cash, you’re not “losing” much: high-yield savings accounts are still paying respectable yields this year (mid-4s to low-5s at many online banks as of Q3 2025). And remember, credit card APRs were ~22.8% in Q4 2024 (Fed data), so the buffer prevents expensive detours. In plain English: your cheap mortgage is a feature, not a bug. Keep it, build 6-12 months of cash if your situation is bumpy, and invest the surplus in a diversified mix. I know, it feels weird to not “kill the debt,” but math is math.

If you originated in late 2023 near the peak: Freddie Mac had the 30-year fixed around 7.79% in October 2023. Ouch. For borrowers who locked around there and still hold that rate, extra principal payments start to look pretty compelling, after you’ve got the buffer. The guaranteed return on prepayment is essentially your mortgage rate (adjusted for any tax effects), which stacks up well against what you can reliably earn risk-free. If rates don’t drop enough for a worthwhile refi, directing some surplus to principal probably makes sense once you’ve got 6+ months of expenses in cash. Small tangent: I’ve seen clients set a rule of thumb like “extra month of principal for every bonus,” which is imperfect but keeps it consistent.

For the 6-7% crowd from 2023-2024: This is the gray zone. Rates this year have floated in the mid-6s to sometimes low-7s, depending on the week and your credit profile. If you’re sitting on, say, a 6.5% note and can’t or won’t refi, the case for prepayment gets stronger once the emergency fund is solid. You don’t have to go all-in; a 50/50 split between investing and extra principal can be a nice compromise that reduces risk and shortens your payoff horizon. Actually, let me rephrase that, if your income is volatile or you’ve got big near-term expenses (kid, roof, whatever), tilt more to cash first. The worst outcome is being house-rich, cash-poor, and forced to borrow at 20%+ because the car decided to die. Seen it. Not fun.

Tax angle (quick, I promise): If you no longer itemize, your mortgage interest isn’t giving you a deduction like it used to. That makes your effective mortgage cost closer to the sticker rate. For someone at 7% who takes the standard deduction, every extra dollar to principal is a clean 7% “return.” For a 3% mortgage holder who does itemize and gets some benefit, that return drops even more, another reason to favor cash and investments. Sorry, this might be getting a bit complicated, but it matters at the margins.

Reality check in 2025: Liquidity still pays okay, markets have had their mood swings, and refi math only works if the new rate meaningfully beats your current one after closing costs. So, baseline plan still stands: build the buffer (3-6 months, up to 12 if your situation is spikier), avoid 20% revolving debt, then allocate based on your coupon. Sub-3%? Cash and invest. Around 6-7%? Split approach or lean to principal. Peaked near 7.8% in late 2023 and still there? After the buffer, extra principal is hard to argue against.

Look, I know everyone wants a clean rule. The thing is, mortgages live on a spectrum. But if you sort by rate era, 2020-2021 low-rate cohort vs. 2023 peak cohort, you’ll land in the right neighborhood 9 times out of 10. And you’ll probably sleep better, which, occassionally, is the real alpha.

Smart exceptions: PMI, ARMs, taxes, and the 2026 wildcard

Here’s the thing, this is where the details occassionally flip the recommendation. A little nuance can save real money, and I mean guaranteed money in a couple of these cases.

PMI as a “return” you can bank: If you’re paying private mortgage insurance and you’re close to 80% loan-to-value (LTV), hitting that threshold can beat almost any alternative. Under the federal Homeowners Protection Act, lenders must allow borrower-initiated PMI cancellation at 80% LTV (with good payment history) and must automatically drop it at 78% of the original value. Typical PMI runs roughly 0.5%-1.5% of the original loan amount per year, depending on credit and down payment. Translate that: on a $400,000 loan, that’s about $2,000-$6,000 a year. If an extra $8-$12k in principal payments gets you below 80% LTV in the next few months, your “return” is the PMI you stop paying, immediate, risk-free, and not taxable. I had a client in April who pulled this off and freed up $240 a month; they still text me about it, which, honestly, never gets old.

ARMs resetting in the next 12-24 months: Look, I get it, if you locked a 5/6 SOFR ARM in 2020 or 2021, that intro rate felt like a cheat code. But if your reset window is 2026 or sooner, this isn’t the time to be heroic with prepayments only. Build cash, shop refi options, and model the caps. Many post-2020 ARMs are tied to SOFR with a 2/1/5 or 2/2/5 cap structure (sorry, jargon, 2/1/5 means a 2% first adjustment cap, 1% periodic cap after, 5% lifetime cap). Earlier this year, the 12‑month SOFR hovered around the mid‑5% range; add a 2.75% margin and, subject to caps, your reset could land around the high‑7s. That’s not a prediction; it’s the math these loans use. So basically, cash plus optionality, having the ability to refi or ride it out, is worth more than squeezing every last dollar into principal right now.

Tax angle in 2025, don’t force it: Most households still don’t itemize, which means mortgage interest isn’t delivering a tax break in practice. IRS Statistics of Income show about 87% of filers took the standard deduction for Tax Year 2021; results for 2022 are similar. With the standard deduction elevated again in 2025 (for reference, it was $14,600 single and $29,200 married filing jointly in 2024), many families won’t clear the hurdle to itemize. Net-net: don’t assume a tax “subsidy” for your mortgage. Run your own math with and without itemizing. If you’re not itemizing, the after‑tax “cost” of your mortgage is basically your stated rate.

2026 sunset risk, plan, but don’t over-engineer: Key individual provisions from the 2017 tax law are scheduled to expire after 2025. That includes the larger standard deduction, the lower marginal brackets, and the $10k SALT cap may change or go away depending on what Congress does. Could this make mortgage interest more likely to be deductible again for some households? Sure. But it could also change brackets in ways that offset the benefit. I keep a sticky note on my monitor that just says “Don’t build a five-year plan on a one-year law”, because I’ve seen people get whipsawed by this before. Use scenarios, not certainties.

How to use these exceptions in the real world:

• If PMI can drop in under 12 months, prioritize the 80% LTV milestone over extra cash padding, within reason. Think of it as buying your way out of a toll.
• If your ARM reset is within 12-24 months, target a bigger cash buffer (6-12 months), get quotes now, and watch rate/fee trade-offs. Don’t ignore caps; they matter a lot right at reset.
• On taxes in 2025, assume standard deduction unless your itemized stack, mortgage interest + SALT + charity, clearly wins on paper.
• For 2026, model two cases: current law extended vs. sunset. Make small, reversible moves. No need to contort your whole plan.

Quick heuristic: PMI within reach? Attack principal. ARM reset looming? Build cash and shop options. No itemizing this year? Treat your mortgage rate as your true cost. 2026 unknowns? Scenario-plan, don’t overreact.

Small confession, earlier this year I wasn’t sure where rates would settle by summer either. Markets were choppy, Fed messaging was, let’s say, nuanced. Anyway, this is why these exceptions exist: they give you clear wins even when the big picture is noisy.

A practical playbook: buffers, buckets, and automations

So, here’s the thing: order matters. You can be great at picking ETFs and still get dragged down by one leaky bucket. This is the clean sequence I’m using with clients right now, and, honestly, at home too.

1. Build a true emergency fund. Target 3-6 months of core expenses if your paycheck is steady; 6-12 months if you’re self‑employed, on commission, or your ARM reset lands within 12-24 months. Park this in a high‑yield savings account or a T‑bill ladder (4-, 8-, 13‑week rungs work nicely). T‑bills settle fast and, this year, they’ve generally paid more than big‑bank savings. Keep this bucket boring and separate. FDIC/NCUA insurance still caps at $250,000 per depositor, per bank, spread funds if needed.
2. Kill toxic debt. Credit cards and personal loans first, no contest. The average credit card APR was about 21% in late 2024 per Fed data, and rates are still hovering in the 20s this year. You can’t outrun that with “smart investing.” Use avalanche (highest APR first) or hybrid snowball if motivation is the bottleneck. Minimums on 0% promos? Fine, but set a payoff date well before the promo ends.
3. Capture your employer match. If your 401(k)/403(b) match is 100% on the first 3-5%, you don’t skip a guaranteed 100% match to prepay a 4% car loan. Contribute at least to the match even while you’re slaying toxic debt. If you have to pick, match wins, every time.
4. High‑rate mortgage (roughly 6%+ from 2023-2024 vintages). After the buffer and the match, channel surplus to extra principal until your risk comfort point. If PMI is in reach, getting below 80% loan‑to‑value can drop PMI and improve your monthly burn. I like a simple rule: split extra cash 50/50 between brokerage and principal until you cross 80% LTV, then revisit.
5. Low‑rate mortgage (~3% era). Prioritize investing once your cash buffer is set. Make only modest extra payments if it helps you sleep at night. Mathematically, low fixed debt that was refinanced during the 2020-2021 window is cheap funding. Emotionally, some folks still want to chip away, totally fine, but don’t starve your future.

Automation that actually sticks

• Two automatic transfers on payday: one nicknamed “Buffer” into savings/T‑bills, one “Principal Prepay” to the mortgage. Separate lanes prevent lifestyle creep from quietly eating the leftover cash. I’ve watched too many good plans die in the checking account.
• Rules, not reminders: auto‑increase retirement deferrals by 1% every 6-12 months until you hit your target. If your ARM reset is within 18 months, temporarily redirect that 1% bump to the buffer bucket.
• Brokerage siphon: after fixed bills and the two transfers, sweep a set dollar amount to your brokerage. Not “whatever’s left.” A number. Even $150 beats vibes.

Quick gut check: if your mortgage rate starts with a 6 or 7 and you’d feel better with less use, prepay some principal after you’ve built the cash moat. If it starts with a 2 or 3, markets likely earn the edge over time, don’t overpay just to feel “busy.”

Look, I get it, markets are still touchy and rate cut odds keep moving. Earlier this year I thought we’d see a smoother glide path by summer; not quite. Anyway, this stack works in choppy conditions because it keeps you liquid, kills the expensive stuff first, and automates the rest. And yes, I know I said “separate accounts” already. I’m saying it again because it’s the piece people skip, and it’s the piece that keeps the whole plan intact.

Keep your optionality: you’re building calm, not just spreadsheets

. Here’s the thing, money buys time and choices first, returns second. Cash gives you options in bad weeks; prepaying debt gives you a guaranteed, can’t-be-argued-with return. Both matter. The art is deciding how much of each, when. And yeah, that balance might be a little different for you than for your neighbor with the same mortgage rate.

My rule of thumb in 2025: build the buffer first. Not kind of. Fully. Three to six months of core expenses, parked in something that actually pays. As of September 2025, many top online savings accounts are around 4.5%-5.0% APY (check your bank, rates move). That’s real yield for doing nothing, which buys you sleep. After the buffer, decide between extra principal or investing based on your after-tax spread:

• If your mortgage is, say, 6.75% and you get no itemized deduction benefit, prepaying principal is a 6.75% risk-free return (before considering liquidity). Hard to beat, honestly.
• If you locked a 2.9% 30-year back in 2021, history suggests the market probably wins the marathon. Since 1926-2023, U.S. large-cap stocks returned about 10% annualized nominal while intermediate Treasuries were around 5% (Ibbotson/S&P data). That doesn’t guarantee your next five years, but it frames the odds.

Quick reality check with today’s backdrop: 30-year fixed quotes this year have been hovering in the ~6.5%-7.25% band for many borrowers, while short-term Treasuries and HYSAs have been near the mid-4s to around 5%. So, the spread isn’t huge right now. Which means, after the buffer, prepaying might be the better emotional and financial call for a lot of households who don’t want use risk. Not for everyone, but for many.

Optionality means you can pivot. Cash buys time. Prepayments buy certainty. You want some of both.

Revisit the plan after big life changes or if rates shift, money is dynamic. New baby? Job change? Your ARM resets? Re-run the numbers. Even a 1% move in rates can flip the spread. And occassionally the best move is to do nothing for a month and just observe. I told a client in May to pause extra principal for 60 days while we watched the rate cut odds wobble; two months later, the decision was obvious.

Don’t chase perfection. Seriously. Perfection is how people freeze. Consistent, boring execution beats the heroic lump-sum move 9 times out of 10. Automate the extra $200 to principal or the $300 to your brokerage and forget it. If you get a bonus, great, top off the buffer to your target, then split the rest 50/50 between principal and investments if you can’t decide. Is that mathematically perfect? Maybe not. Is it good, repeatable, and behavior-proof? Yeah.

One more nuance I should mention: taxes. If you itemize and actually recieve a meaningful mortgage interest deduction, your after-tax mortgage cost might be, say, 6.75% × (1 − 24%) ≈ 5.13%. That could tilt you back toward investing, especially if you’re using low-cost index funds and you’ve already maxed tax-advantaged accounts. I was going to get into factor tilts here but, you know what, different rabbit hole.

So, balance the boring with the flexible: buffer first, then let the after-tax spread pick your next dollar, extra principal when rates bite, investing when expected returns justify the risk, and adjust when life or rates change. Your future self will say thanks, even if they never notice the spreadsheet.

Frequently Asked Questions

Q: Is it better to pay extra on my 3% mortgage or build a cash buffer first?

A: Look, it depends, but in 2025, liquidity usually wins with rates that low. If your mortgage is ~3%, every extra dollar is basically a 3% pre-tax return, but it’s locked in your walls. Meanwhile, surprise costs and layoffs still happen. Redfin estimated in 2024 that about 60% of borrowers had rates under 4%, and the Fed’s 2024 SHED said 37% would struggle with a $400 emergency. That combo screams “keep cash.” Practical order of operations: (1) Build an emergency fund, 3-6 months of expenses; 6-12 if your income fluctuates. (2) Kill high-interest debt (anything above ~8-10% APR). (3) Grab any 401(k) match. (4) Top up your cash buffer for home repairs. (5) Then consider mortgage prepayments if it still makes sense. And remember, HELOCs can be cut or frozen during stress, so don’t rely on them as your only safety net.

Q: How do I figure out how big my cash buffer should be?

A: Start with your monthly must-pay expenses (mortgage, utilities, groceries, insurance, minimum debt payments). Multiply by 3-6 for most households; go 6-12 months if you’re commission-based, a single-income household, or work in a cyclical industry. Because you’re a homeowner, add: (a) your insurance deductible, and (b) a maintenance reserve, rule of thumb is 1% of home value per year, but you can hold 3-6 months’ worth of that in cash and refill it. Park the buffer in an FDIC-insured high‑yield savings account. Automate transfers right after payday so you actually stick to it. And if you need to prioritize: hit one month fast, get to three months over the next few quarters, then keep building while markets and life behave.

Q: What’s the difference between prepaying a fixed-rate mortgage at 3% and keeping cash in savings right now?

A: Prepaying a 3% fixed mortgage “earns” you a risk-free 3%, but it’s illiquid and the return matches your after-tax mortgage rate (lower if you itemize and deduct interest, which many don’t after TCJA). A high‑yield savings account this year is generally around the mid‑4% APY range, give or take, which is taxable but fully liquid. So, if your HYSA yields ~4-5% and your mortgage is 3%, the cash likely nets more before taxes and gives you flexibility. If rates fall later this year and HYSA yields drop, reassess. The swing factor isn’t just the spread, it’s avoiding 20% APR credit card debt when life happens. Liquidity prevents bad, expensive choices.

Q: Should I worry about tying up cash in home equity if I have a HELOC as backup?

A: Yeah, at least a bit. HELOCs are variable-rate and can be reduced or frozen when banks get nervous, that actually happened in past stress periods. So, alternatives that keep you flexible: (1) Build a core cash buffer in HYSA (your first line of defense). (2) Hold a small Treasury bill ladder for 3-6 months of expenses if you want a tad more yield while staying liquid. (3) Keep the HELOC as a secondary backstop, not your primary safety plan. (4) If you’re really cautious, pre-approve a 0% intro APR credit card and file it away, only for true emergencies, paid off before the promo ends. Bottom line: use multiple layers, with cash up front, so you don’t get caught house rich, cash poor when something breaks on a Friday night.

@article{pay-off-mortgage-or-build-a-cash-buffer-in-2025,
    title   = {Pay Off Mortgage or Build a Cash Buffer in 2025?},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/pay-mortgage-or-build-cash/}
}