The 2% Mortgage Hack Explained

Folks on social media love coming up with so-called “hacks” to excite their followers.

In the mortgage realm, this typically means highlighting math that seems unbelievable at first.

And it usually revolves around paying down a mortgage ahead of schedule, much to the chagrin of the banks.

For the record, the banks probably don’t care that much if at all, since these days they’d probably pay you more if you put money in a savings account instead of toward the mortgage.

But I digress – let’s look at the latest hot trend, the 2% mortgage hack.

What Is the 2% Mortgage Hack?

In a nutshell, the 2% mortgage hack requires you to increase your mortgage payment 2% each year.

This doesn’t mean just paying an extra 2% based on the original monthly payment.

Instead, you pay 2% extra in year two, then 2% more on top of the 2% extra in three year, and so on.

Every 12 months, your mortgage payment grows larger, based on the number the year before.

For example, let’s look at a $400,000 loan amount with a 6% mortgage rate and a 30-year loan term. Pretty common scenario nowadays.

If you were to just make the normal, minimum required payment, it’d be $2,398.20.

Now imagine starting in year two, you add 2% to that payment. It’s $2,446.16. That’s not a big jump up. It’s about $48 more per month.

For most, this would be manageable, and likely wouldn’t require any lifestyle changes or cutting back.

That alone wouldn’t do much though. It would merely shorten your loan term to 28 years and six months.

However, it would save you nearly $29,000 in interest. Not too shabby.

But where the 2% mortgage hack gets interesting is you compound the extra payments each year.

So beginning in year three, we add another 2% on top of the increased payment from year two.

That puts payments in year three at $2,495.09. In year four, it climbs to $2,544.99. In year five, it’s $2,595.89.

Each year, you’re adding 2% from the year prior. You can do this by multiplying the mortgage payment by 1.02 in a calculator.

By year 20, the mortgage payment is nearly $3,500 per month, but it is gradual and knocks down the outstanding loan balance a lot faster.

What Does the 2% Mortgage Hack Accomplish?

In short, the 2% mortgage hack reduces your total interest expense and shortens your mortgage loan term.

Many of the posts I’ve seen about it claim it reduces your loan term by 12 to 14 years, but it depends on the math, aka the loan balance and interest rate.

The amount of interest saved will also vary based on those inputs, but the general idea is you can significantly reduce your loan term and save on interest.

So instead of waiting 30 years to own your home free and clear, you can own it a lot sooner, assuming that’s a goal.

And you can pay a lot less interest in the process.

In my example, you’d reduce the loan term by about a decade, so 20 years instead of 30.

The interest savings from making extra mortgage payments would also reduce your interest expense by about $135,000.

Simply put, you’d have a paid off mortgage in about 20 years and save more than six figures. Nice!

You’re Essentially Emulating Inflation by Increasing Your Mortgage Payment Annually

By making a payment that is 2% higher each year, you’re basically emulating the rate of inflation.

The dollar’s value erodes each year by around this amount, so by paying the extra 2%, you’re essentially adjusting it to keep pace.

This should mean it’s not an extra burden, as your wages/income might also be expected to increase by this amount.

And everything else you pay might increase by this amount too, whether it’s your grocery bill or homeowners insurance.

It’s also quite common for renters to see their monthly rent get increased by their landlord annually.

So if they were paying $2,000 per month, the following year they might be told the new rent is $2,100.

That’d actually be a 5% increase, and this illustrates why homeownership can be great. It’s an inflation hedge.

You aren’t required to pay more each year with a mortgage, but as this strategy shows, you can save a lot if you choose to.

And because 2% is such a small number, it’s a gentle approach to paying extra toward the mortgage without overextending yourself.

But is it the best strategy out there?

You’ll Save Even More by Paying Extra Earlier On

While the 2% mortgage hack is a cool way to reduce your interest expense and shorten your loan term, without a big bump in payment, it’s one of many options.

First off, it should be noted that some homeowners may not want to pay off the mortgage early at all.

This is especially true for those with low mortgage rates, whether it’s a 2% or 3% rate. For these folks, their money might be better off deployed elsewhere.

For those who do want to pay off the mortgage early, you save more when you pay more earlier on.

What if instead of 2% beginning in year two, you just started paying 5% extra per month immediately?

Well, you’d reduce the loan term by about 15 and a half years and save $211,000 in interest.

So you could save more if you don’t wait 12 months to begin making larger payments, and even more if you look beyond a 2% bump.

The 2% increase is only $48 extra. Chances are homeowners can go a little bigger, granted over time that number does get exponentially bigger.

But you could still implement say a 3% or 4% increase right off the bat and turbocharge the savings of this strategy.

Read on: Should I prepay the mortgage or invest instead?

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.

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