Emergency Fund vs. Mortgage: Why Cash Comes First

What the pros actually do: cash first, then principal

Look, the way disciplined investors think in 2025 is pretty simple: protect liquidity before you turbo-charge your home equity. And it’s not because they don’t like a paid-down mortgage (they do ) it’s because cash keeps you solvent and flexible when jobs wobble, rates shift, and life still throws curveballs. Home equity is great on paper, but it doesn’t pay the bill when your car dies on a Tuesday or your contract doesn’t get renewed. Cash does. Equity doesn’t.

So, why does this decision feel harder now than it did a few years ago? Because the backdrop is noisy. Mortgage rates have eased off the late-2023 peak, Freddie Mac’s weekly survey topped out at 7.79% in October 2023, but they’re still higher than the pre-2020 era when 3-handle rates spoiled everyone. Short-term yields added to the confusion: in 2023-2024, T‑bills were over 5% for much of that period, making “hold cash” a no-brainer for a while. In 2025, those yields have been drifting lower, which changes the math again and makes folks ask, “Should I just prepay the mortgage instead?”

And there’s the debt reality check. Credit card delinquencies rose through 2024 according to Federal Reserve data, not exactly a crisis, but enough of a trend to remind us that thin cash buffers get people in trouble fast. Add the tax angle: the TCJA’s higher standard deduction runs through 2025, so many homeowners still don’t itemize. Translation: for a lot of people, that mortgage interest isn’t deductible, which nudges the after-tax math toward paying down principal.. but only after you’ve built a real emergency fund.

Here’s the thing, pros sequence their moves. They don’t guess. They stack cash first, then attack principal. Actually, let me rephrase that: they build a specific liquidity runway (months of expenses, not a random number they pulled from a blog), then they accelerate principal. It’s boring, it’s repeatable, and it keeps you from having to swipe a 22% APR card to handle a roof leak. This actually reminds me of a client in 2011 who pre-paid so aggressively he had to borrow at awful rates when a job offer fell through. Great house, not enough cash. The irony still stings.

Okay, this part gets me a little too excited, because it’s where the math and the behavior finally agree:

• Cash first: Build an emergency fund so you can pay bills without selling assets at the wrong time or paying double-digit interest. Yes, even if the yield isn’t what it was last year.
• Then principal: Once you’ve got your runway, prepayments lock in a risk-free return equal to your mortgage rate. Simple idea, many words, I know, you pay less interest, you keep more money, you sleep better.
• Reality check: With rates still above pre-2020 norms and short-term yields easing in 2025, the trade-off is closer, but liquidity still wins the opening round.

What you’ll get from this section: how much cash pros target before a single extra dollar hits principal, how to weigh your mortgage rate against current cash yields, and when it actually makes sense to pivot from saving to prepaying. And a few guardrails so you don’t do the right thing in the wrong order and recieve the wrong outcome.. but that’s just my take on it.

Before you move a dollar: map your real risk

Here’s the unsexy checklist the pros actually run through before anyone shifts cash to the mortgage. It’s boring, but it’s the stuff that keeps households out of trouble when the wind shifts. And the wind does shift, rates are still higher than the 2015-2019 stretch, with 30-year fixed mortgage quotes hovering around 7% this year by most lender surveys, while high-yield savings has eased from last year’s peaks. Anyway, start here.

• Job stability & income volatility: If you’re self‑employed, heavy on commission, or at a startup where the runway depends on the next funding round, you need a thicker cushion. I tell volatile earners to target at least 6-12 months of core expenses in cash before prepaying. W‑2 with a stable employer and tenure? Maybe 3-6 months can fly. I’m still figuring this out myself for a client who’s 80% bonus, some years it rains, some years it drizzles.
• Household resilience: Single-income households carry more concentration risk, no backup paycheck if something snaps. Add dependents or high healthcare deductibles and the cash number climbs. A $3,000 family deductible means one ER visit can vaporize a month of savings. Dual income with strong sick-leave policies is a very different ballgame.
• Mortgage type & reset risk: Fixed-rate? Your payment won’t surprise you. ARM resetting in the next 12-24 months? That’s real risk. Many ARMs are indexed to SOFR; if yours adjusts soon, model the cap structure and assume a payment that’s, say, $200-$600 higher, rough math, but it’s the right order of magnitude for a mid-6% to around 7% move on a typical balance. If an ARM reset is coming, building cash or refinancing strategy beats prepaying principal blindly.
• Current rate & years remaining: Prepaying a 7% mortgage is effectively a 7% risk‑free return, before tax considerations. Prepaying a 2.9% relic from 2021? That’s a nice feeling, but financially it’s low-return compared to even today’s decent cash yields. Small aside: I still meet folks considering extra payments on sub‑3% loans because it “feels responsible.” It is, emotionally. On paper, not so much.
• Loan‑to‑value and PMI status: If you’re above 80% LTV and paying PMI, hitting 80% can drop PMI on request; by law (Homeowners Protection Act of 1998), lenders must automatically cancel at 78% LTV with good payment history. That’s a hard-dollar win. I’ve seen PMI run $40-$200+ per month. Quick math: a $300k loan at 88% LTV that you nudge to 80%, that can retire PMI and raise your effective return well beyond your stated rate in year one.
• Other debts, rate triage: High‑APR credit cards beat everything. The Federal Reserve reported the average interest rate on credit card accounts assessed interest was 22.8% in Q4 2024. If you’ve got balances anywhere near that, those get paid first, period. I know, it’s not fun. But a 22% hole is too deep to ignore.
• Liquidity access (real, not theoretical): Do you have a taxable brokerage you can tap without ugly tax lots? A HELOC helps after you have a cash fund, not instead of one, HELOCs can be frozen or repriced when you need them most. Vested RSUs vesting later this year? Great, schedule around that, but remember RSU tax withholding is often 22% by default while your real bracket could be higher.
• Behavioral fit: Honest question, does a big cash balance tempt you to spend, or does it buy peace of mind? Some folks need the psychological win of a falling mortgage balance. Others need the flexibility of cash to sleep at night. Neither is wrong. I occassionally set up “buckets”: one boring high‑yield bucket for true emergencies, one tiny “prepay” bucket for the itch to reduce principal. Keeps everyone sane.

Look, the thing is, you don’t have to perfect this. You need a clear order of operations. I sketch it on a yellow pad, yes, I’m that person, and we run a quick risk pass: income stability, household setup, mortgage mechanics, debt triage, liquidity sources, behavior. If three or more of those flash yellow, you shore up cash first.

Rule of thumb I use right now: cover 3-6 months expenses if your income is stable; 6-12 if it’s lumpy. Knock out any debt north of ~10% APR. If you’re paying PMI, aim to reach 80% LTV. After that, compare your mortgage rate to current cash yields and act, don’t overcomplicate it.

I was going to get into tax angles here, deductibility, SALT caps, itemizing vs standard, but that rabbit hole can wait. The priority is surviving bad luck without selling assets at the wrong time. Last year a client with a gorgeous brokerage portfolio had to liquidate in a down week to cover a surprise medical bill. We fixed the plan. You should too, before you move a dollar.

The 2025 math: after-tax rate vs safe yield, plus liquidity premium

The 2025 math: after‑tax rate vs safe yield, plus liquidity premium

So, here’s the clean decision rule I’m using this year: compare your after‑tax mortgage cost to what your cash can safely earn today, then layer in a liquidity premium. If the spread is meaningfully positive, prepay. If not, keep cash and sleep better.

Step 1: compute your after‑tax mortgage cost

• Don’t itemize? Your effective rate ≈ your stated rate. A 6.75% fixed is, well, ~6.75% to you.
• Do itemize? After‑tax rate ≈ rate × (1 − marginal tax rate), assuming your itemized deductions clear the standard deduction. Example: 7.00% × (1 − 24%) ≈ 5.32%.
• Itemizing check, 2025: Standard deduction is $15,000 single, $30,000 married filing jointly. SALT is still capped at $10,000 through 2025. If your mortgage interest + allowed SALT + charity doesn’t beat the standard, you’re not getting a mortgage interest benefit. People miss this all the time.

Step 2: what can cash safely earn?

• Recent history: In 2023-2024, high‑yield savings, money market funds, and T‑bills routinely paid ~5%+. For instance, 3‑month T‑bills averaged around 5.3% in July 2024 (Treasury auction data), and 6‑month bills printed near 5.4% at points in late 2023.
• 2025 reality: Yields have been easing this year as policy expectations shifted. Many HY savings and government money market funds are now printing something in the mid‑4s to around 5%. T‑bills are similar, but please check current quotes the day you act, rates move, and they’ve slipped a few tenths since spring.

Step 3: add a liquidity premium

Look, $1 in cash beats $1 in home equity during an emergency. I mentally charge a 1% “liquidity premium” for tying up dollars in the house. So your hurdle for prepaying is: your after‑tax mortgage rate should exceed your safe cash yield + ~1%. If your after‑tax is 5.3% and your money market is 4.6%, the spread is only 0.7%, below my liquidity charge, so I’d keep the cash unless you’ve already overfunded the emergency pile.

Time horizon matters

• Early‑amortization dollars save more interest per dollar because balances are high. Every $1,000 prepay in year 2 hits more interest than in year 22.
• Late‑stage loans behave differently; much of your scheduled payment already goes to principal. The incremental benefit of prepaying shrinks, so the yield comparison really needs to favor prepaying.

Refi optionality

Prepaying is one‑way. If mortgage rates drift down later this year or in 2026, you’ll wish you kept optionality to refinance or redeploy cash. I occassionally see folks prepay a 7% loan right before rates slip to the mid‑6s, no disaster, but not ideal. Keep some dry powder if cuts are on your bingo card.

PMI math

Different rule here. Killing PMI with a lump‑sum often beats incremental prepay. Example: if PMI is $200/month and you can drop to 80% LTV with a $8,000 principal payment, that’s a guaranteed $2,400/year pre‑tax saving, plus reduced interest on the lower balance. That’s around 30% cash‑on‑cash in year one before tax effects. Run your lender’s exact requirements; then do the breakeven. Nine times out of ten, it’s worth it if you can afford it.

Inflation angle

Fixed‑rate debt can be attractive in real terms when wages keep up. BLS data showed year‑over‑year average hourly earnings growth around 4% late last year (Dec 2024), and it’s been a bit lower, high‑3s, at points in 2025. If your mortgage is, say, around 7% nominal but your real burden is easing as income climbs, you don’t have to rush to zero. Anyway, just don’t ignore the real math.

My quick rule in 2025: after the emergency fund is set and high‑APR debt is gone, prepay only if after‑tax mortgage rate − safe cash yield is ≥ 1%, or if a lump‑sum kills PMI. Otherwise, let cash work and keep your flexibility. Speaking of which, I still keep a yellow pad tally because I like to “feel” the spread before I hit submit. Old habits.

Right-sizing the emergency fund (and where to park it)

So, here’s the thing: the emergency fund isn’t sexy, but it’s the difference between an inconvenience and a crisis. Start with the baseline: aim for 3-6 months of essential expenses (rent/mortgage, utilities, groceries, insurance, minimum debt payments, transit). If you’ve got a single income household, you’re self‑employed, or you work in a niche industry where job searches take longer, stretch that to 6-12 months. I’ve advised plenty of dual‑income families who can live with 3-4 months, but freelance designers in a specialized vertical? They sleep better at 9-12. Honestly, I wasn’t sure about this either early in my career, I underfunded and learned the hard way when a relocation took 5 months longer than planned.

If you’re at zero, don’t wait for perfect. Build a starter buffer of 1 month as fast as you can. Then scale toward your target. I’m still figuring this out myself with clients who have variable income, sometimes we set a dollar target (say $25k) and a time target (say 9 months) and just hold ourselves to a fixed monthly transfer. It’s not fancy. It works.

Where to park the cash so it actually earns something without drama:

• FDIC‑insured high‑yield savings: Simple, liquid, and insured up to $250,000 per depositor, per bank, per ownership category (FDIC rule that still applies in 2025). As of September 2025, top online accounts are generally in the 4.3%-5.0% APY range, give or take. Rates move, but you don’t need the absolute top tick, reliability and fast transfers matter.
• Money market funds (brokerage): Government MMFs have been yielding roughly around ~5% this year, depending on the week and the exact mix. Not FDIC‑insured, but they invest in short‑term government and agency paper. Use a big, well‑run fund, and double‑check your sweep features. SIPC protects custody if a broker fails (up to $500k, including $250k cash), but it doesn’t protect market value. Tiny difference that matters.
• Short T‑bill ladders (4-26 week): Direct from Treasury or via brokerage. They’ve been in the neighborhood of ~4.8%-5.2% at points this year. Build a 4‑ or 8‑week ladder that rolls automatically so you always have maturities coming due. Treasury bills are backed by the U.S. government, and the maturities keep things liquid.

Don’t reach for yield. Keep the fund boring, liquid, and predictable. No corporate bond funds, no dividend stocks, no crypto, no lock‑ups. Emergency money that can drop 10% is not emergency money, it’s a hope and a prayer. And we don’t budget with hope.

Automation that actually sticks

• Route a fixed percent of each paycheck (5%-10% is common; 15% if you’re racing) into the emergency account until you hit the target. Then redirect the same dollars to mortgage prepayments or other priorities. Keep the habit, just change the destination.
• Use a separate, nicknamed account, something like “6‑Month Safety Net”, to reduce the urge to raid it. Out of sight is out of mind; it sounds silly, but it works because we’re human.
• Replenish rule: if you tap it, for the water heater, a deductible, whatever, pause extra mortgage prepayments and rebuild the fund back to target first. Then resume prepaying. This ordering avoids the yo‑yo effect.

Anyway, the thing is, liquidity buys you choices. Rates are decent this year, so you’re not “wasting” cash, safe options are paying almost as much as many mortgages after tax. Actually, let me rephrase that: the spread isn’t always big enough to justify starving your safety net. If you’re torn between one more extra principal payment and finishing the fund, I’d finish the fund. I still keep a silly sticky note on my monitor: “Sleep beats yield.” It’s corny, but it’s saved me from making the smart‑looking but wrong move more than once.

When paying down the mortgage actually wins

So, here’s where extra principal makes real sense, after the emergency fund is legit and those 20% APR cards are gone. If you’ve hit your cash cushion target and your income is steady, then the next question is the spread. Your after‑tax mortgage rate needs to beat what your safe cash actually earns right now. Freddie Mac’s survey put the 30‑year fixed around 6.7% in August 2025, and 6‑month T‑bills were near 5.2% back in July 2025. If you’re paying around 7% on the mortgage and you don’t itemize deductions (most households don’t, IRS data in 2021 showed roughly 10% itemized), your after‑tax mortgage cost is basically the sticker rate. In that case, every dollar to principal “earns” about 6-7% risk‑free, which beats parking more in cash at 4.75-5.25% APY at the moment.

PMI is the other big trigger. If you can drop below 80% loan‑to‑value (you can request cancellation) or hit 78% by schedule (lender must cancel under the Homeowners Protection Act), the monthly savings start immediately. Typical PMI runs about 0.5%-1.5% of the original loan amount per year. On a $400,000 loan, 0.8% is $3,200 a year, about $267 a month. A targeted lump sum to cross that 80% line can have a payback measured in months, not years, especially if your rate is moderate and PMI is the drag. I did this on a condo years ago and, if I remember correctly, the breakeven was like 8 or 9 months, it felt like I gave myself a raise.

Retirement timing matters, too. If you’re within 5-10 years of stopping work, less required cash flow is risk management. Markets don’t always cooperate when you need them to. I’ve watched people in 2008 and 2020 delay retirement because the payment was still hanging over them; getting that balance down, doesn’t need to be zero, shrinks your fixed nut and reduces sequence‑of‑returns risk. Basically, it buys you flexibility when your paycheck stops.

Windfalls are another green light. Bonus hit, RSUs vested, small inheritance, you don’t need all of it for near‑term goals? Skimming a chunk to principal can be cleaner than chasing an extra 0.4% somewhere, especially because behavior matters more than spreadsheets. The guaranteed balance reduction beats the theoretical extra yield you might not stick with when life gets busy. I know myself: I say I’ll rate‑chase every quarter, then hockey starts and I forget.

How to prepay without overthinking it

• One extra payment per year: Easiest is to divide your monthly payment by 12 and add that to each month. On a 30‑year around 7%, this can cut ~4-5 years and save five figures in interest. Your servicer should allocate it to principal, confirm the setting so it doesn’t sit in suspense.
• Biweekly schedule: 26 half‑payments = 13 full payments per year. Same idea as above, just automated by the calendar. Watch for junk fees, some biweekly “programs” charge for what you can DIY.
• Targeted lump sums at the anniversary: Throwing principal right after an installment posts maximizes days outstanding saved, and if you’re near 80% LTV, aim the lump sum to clear PMI in one shot.

Here’s the thing: you don’t need perfection, you need a rule you’ll follow. Set a threshold: if your after‑tax mortgage rate is at least 1% above what your cash can earn safely today, prepay gets the nod; if the spread is tighter, keep building liquidity or move to higher‑yield but still safe options first. And if anything knocks your cash cushion below target, pause prepayments and rebuild, no shame in that. I think this balance keeps you from the yo‑yo effect.

Quick recap: stable income, emergency fund funded, mortgage rate meaningfully above your safe yields, PMI in sight, or retirement on the horizon, those are your green lights. Guaranteed progress > maybe‑returns, especially when you’ll actually stick with it.

Small tangent before I forget, confirm your servicer doesn’t have a prepayment penalty. They’re rare on standard conforming loans originated last year and this year, but I still see the odd portfolio loan with a clause. Also, write “apply to principal” in the memo or pick the principal‑only option online, because I’ve seen payments sit as “advance” by accident and you don’t recieve the interest savings you thought you would.

A simple 2025 playbook you can actually follow

So, here’s the thing, I like order of operations because it saves you from decision fatigue. This is the no-heroics version that balances math, risk, and sanity. And honestly, I wasn’t sure about this either years ago, but the numbers keep pushing me back to the same path.

1. Kill toxic debt first. Credit cards and personal loans are the fire on the stove. Federal Reserve data in 2024 showed average credit card APRs on accounts assessed interest around the high-22% range. You can’t outrun that with safe yields. If your card is over ~15%, it’s priority #1. Use the avalanche method (highest APR first), and keep just a mini buffer so you don’t relapse on the card. I know, it’s not fun. It’s still the fastest guaranteed return in your whole plan.
2. Build a 1‑month starter cushion fast; then 3-6 months (6-12 if your job is shaky). Start with one month of core expenses in a high‑yield account. Earlier this year, legit online savings and T‑bills were around the mid‑4s to ~5% APY, while the FDIC’s published “national average” savings rate in 2024 sat under 0.5%. Use the higher‑yield option, but keep it safe and liquid. If your income is seasonal or you’re in a churn‑heavy industry, bias toward 6-12 months. Yes, it’s a lot. It also keeps you from paying 22% APR again when life happens.
3. Capture easy employer matches while you build the fund. Free match money beats prepaying anything. Vanguard’s 2023 data shows a typical employer match around 4% of pay. Contribute at least to the match in your 401(k) while you’re finishing that emergency fund. Skipping a match to prepay a 6.75% mortgage is usually a bad trade.
4. Re‑check whether you itemize in 2025. With the TCJA still intact through the end of 2025, many households won’t itemize, so they’re not actually deducting mortgage interest. If you don’t itemize, your mortgage rate is your mortgage rate. If you do itemize, use the after‑tax rate when you compare against safe yields. I’m repeating myself a bit, but the after‑tax rate is the real rate.
5. If PMI is in play, consider a targeted prepay to drop it. PMI typically auto‑cancels at 78% scheduled LTV by law (HOPA), and you can request removal at 80% with a good payment record and no value decline. Do the math: a one‑time principal push that kills $70-$200/month in PMI often beats any other use of cash. If you’re already PMI‑free, compare your mortgage’s after‑tax rate to what you can earn in safe instruments today. With 30‑year mortgage rates sitting around the mid‑6s to low‑7s this summer per Freddie Mac’s survey, the spread vs. 3-12 month Treasuries has been meaningful, but it’s not always decisive.
6. Once the fund is set and the math favors prepaying, automate. Set a recurring principal‑only transfer and forget it. Doesn’t have to be huge, consistency is the compounding. Revisit once a year. Actually, let me rephrase that, revisit at least once a year. And, tiny admin note again: label it “principal only” so your servicer doesn’t park it as an advance. I’ve seen that happen and you don’t recieve the savings you expected.
7. Reassess when conditions change. If we get rate cuts later this year, your safe yields might drift down and refinancing odds might improve. Or your job changes, or a new baby, or a relocation. Any of those can flip the decision between prepaying vs. saving vs. investing. This isn’t a one‑time choice; it’s a standing policy.

Look, the topic gets complex quickly, tax rules, employer plans, PMI quirks, refinance math. The thing is, this order keeps you from tripping over the big stuff: crush high‑rate debt, lock in resilience, grab free money, and only then weigh prepayments against real after‑tax costs and today’s safe yield. Not perfect, but it’s practical, and you’ll probably stick with it. And sticking with it tends to beat everything else.

Wrap-up: cash buys time, principal buys sleep

Wrap-up: cash buys time, principal buys sleep. Look, the short version for 2025 is simple: build the emergency fund first, then get picky about mortgage prepayments using after‑tax math. Liquidity isn’t some abstract concept, it’s how you avoid credit‑card rates, panic sales, and awkward calls to your parents. The Federal Reserve’s 2023 Economic Well‑Being report showed only 63% of adults could cover a $400 expense with cash or its equivalent, which means a big chunk still can’t. That’s the case last year too if I remember correctly. An emergency buffer is the default move for most households, you know?

Exceptions exist, but they’re specific:

• PMI drop: If a targeted prepayment gets you to 80% loan‑to‑value and knocks out private mortgage insurance, that’s often worth it. Under the Homeowners Protection Act, lenders must cancel PMI at 78% of the original value and you can request at 80%. Typical PMI runs about 0.5%-1.5% of the original loan amount per year (industry ranges as of 2024). Killing that cost feels like a risk‑free raise.
• Very high mortgage rate: If you’re sitting on around 7% or higher and refi isn’t feasible yet, a measured prepayment might beat what cash earns after tax. Key phrase: after tax.

Cash buys time; principal buys sleep. You probably want both.

On the math: compare after‑tax returns, not headlines. A 3‑month T‑bill near 5% in September 2025 (that’s roughly where bills have hovered much of this year, with the policy rate at 5.25%-5.50%) doesn’t translate to 5% in your pocket. If you’re in the 24% federal bracket and 5% state, a 5.0% T‑bill nets about 3.8%-3.9% after taxes. Your 6.75% mortgage is also an after‑tax number unless you itemize, and most don’t. IRS data showed about 87% of filers took the standard deduction in 2021, and that pattern’s persisted under the higher TCJA thresholds. So, for a lot of folks, mortgage interest isn’t actually reducing taxes. That’s why headline-to-headline comparisons can mislead.

Liquidity has real value, not just spreadsheet value. Cash lets you handle home repairs, job hiccups, and, frankly, sleep better. I’ve seen people prepay hard, then turn around and swipe a 20% APR card when the HVAC dies. That’s backwards. Build 3-6 months of basics (more if you’ve got variable income), and keep it in boring instruments, high‑yield savings, T‑bills, or a simple ladder. Anyway, small tangent, this actually reminds me of a client in 2011 who over‑prepaid and then had to re-borrow on a HELOC at a bad time. Not fun.

Revisit the plan. What won last year might not win now. Safe yields hovered around 5% through 2024 and are still close in Q3 2025, but if we get cuts later this year, that math shifts. Life shifts too, kids, relocations, new jobs. Make this a standing policy you tweak, not a one‑and‑done. And tiny admin thing again: when you do prepay, label it “principal only” so the servicer doesn’t park it as an advance. I’ve seen that happen and you don’t recieve the savings you expected.

Next up worth reading (short hits that actually help):

1. T‑bill ladders for cash management, rolling 4-13 week bills to keep liquidity while earning near policy rates.
2. PMI removal timing, how amortization schedules and home‑value evidence work, and what your servicer will accept.
3. Tax planning ahead of 2025 sunsets, SALT cap still $10k through 2025, the higher standard deduction scheduled to expire after 2025; what that means for mortgage interest value.
4. Roth IRA as a backstop, contributions can be withdrawn tax‑ and penalty‑free, which, I think, makes it a decent secondary “emergency” bucket if you’ve maxed other cash.
5. HELOCs as a secondary buffer, set one up while income is strong, but don’t treat it as a substitute for cash. It’s a parachute, not the plane.

So, yeah, cash first for resilience, then principal where the after‑tax numbers and your stress levels say it’s worth it. If you’ve read this far, you’re already doing better than most.

Frequently Asked Questions

Q: Should I worry about losing the mortgage interest deduction if I build cash first?

A: Probably not, and here’s why: the TCJA’s higher standard deduction runs through 2025, so a lot of homeowners still don’t itemize. If you don’t itemize, your mortgage interest isn’t reducing your taxes anyway. So, the after-tax “return” from prepaying is basically your rate. Build a real cash buffer first; then if you still don’t itemize, extra principal makes more sense.

Q: How do I decide how big my emergency fund should be before I start paying extra principal?

A: Start with a real runway, not a feel-good number. If your job is stable W‑2, target 3-6 months of essential expenses. If you’re a contractor, commission-heavy, or supporting dependents, think 6-12 months. Park it in a high‑yield savings account, not the market. Knock out any double‑digit credit card balances first, keep insurance deductibles in cash, and automate transfers right after payday. Once the fund is set and revolving debt is handled, then redirect surplus to extra principal. If you’re nervous about job risk this year, lean toward the higher end. I know, it’s boring, boring keeps the lights on.

Q: What’s the difference between prepaying my mortgage and holding cash now that short‑term yields are lower in 2025?

A: Prepaying the mortgage “earns” a risk‑free return equal to your mortgage rate, but it’s illiquid, you can’t swipe your home equity to fix a transmission on Tuesday. Cash yields were 5%+ in 2023-2024; this year they’ve drifted lower, so the rate gap narrowed for some people. Still, cash buys flexibility: job hiccups, medical bills, or timing lump‑sum opportunities. I tell clients: match prepayments to surplus cash only after your emergency fund is set, your high‑interest cards are zeroed, and retirement matches are captured. If your mortgage is super low (like a 3‑handle from pre‑2020), cash and investing often beat prepayment. If your rate is higher and you won’t miss the liquidity, extra principal starts to look better, just don’t starve the rainy‑day fund.

Q: Is it better to throw extra at a 6.5% mortgage or build cash if my savings account is around 4% this year?

A: So, here’s the thing: math and survival both matter. At 6.5%, every dollar of prepayment earns a guaranteed 6.5%, not bad. But if that dollar was your last liquid dollar, you’ve traded a nice return for a liquidity headache. My sequence in 2025 goes like this:

1. Build a starter fund of 1-3 months of essentials as fast as you can. Park it in a high‑yield savings account you can actually access.
2. Kill any double‑digit credit card balances, those are emergency-fund leaks.
3. Grab your 401(k) match (free money beats 6.5%).
4. Expand the emergency fund to 6 months if your income is steady; 9-12 months if your income is volatile, you’re self‑employed, or you’ve got dependents.
5. Only then choose between extra principal and investing. With a 6.5% mortgage and ~4% cash yield, prepaying looks good on paper, but don’t underfund cash. You still need a buffer for job risk, healthcare deductibles, or, you know, life.

Tax wrinkle: if you don’t itemize under the TCJA (still in place this year), your after‑tax mortgage rate is basically 6.5%, which strengthens the case for prepaying, after the cash runway is set. Practical tactic I like: keep 6-9 months in cash, then set a monthly autopay to principal plus a quarterly lump sum from bonuses. And, occassionally, consider a HELOC as a backstop, but don’t rely on it as your only emergency plan; lenders can freeze lines when you most need them. Net-net: cash first, then principal. I’ve seen too many smart people get upside down by being “house rich, cash poor.”

@article{emergency-fund-vs-mortgage-why-cash-comes-first,
    title   = {Emergency Fund vs. Mortgage: Why Cash Comes First},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/payoff-mortgage-or-emergency-fund/}
}