What a small extra payment does
Every extra dollar goes straight to principal. It lowers the balance that interest is charged on, every month for the rest of the loan, so its effect grows over time. The required payment does not change; the loan simply runs out sooner, and the payments you no longer make are the saving.
On $320,000 at 7.4% over 30 years the payment is $2,215.62 and total interest is $477,617. Adding $200.00 a month saves $130,520 of interest and ends the loan 6 years 11 months early.
| Extra | Interest saved | Paid off early by |
|---|---|---|
| $100.00 a month | $77,519 | 4 years 1 month |
| $200.00 a month | $130,520 | 6 years 11 months |
| $500.00 a month | $224,679 | 12 years 5 months |
| One extra payment a year ($184.64 a month) | $123,452 | 6 years 7 months |
Timing matters
The earlier the money goes in, the longer it saves interest. A single $10,000 payment at the end of the first year saves $66,481. The same sum paid in year 20 saves $10,387. That is why a tax refund or bonus put toward the loan early in its life goes further than the same money in the final years.
Before paying extra, ask the servicer to apply it to principal, not to next month's payment, and check that the loan has no prepayment penalty. Most mortgages made since 2014 do not, and the rules limit penalties on the ones that do.
Ending PMI sooner
Extra payments also bring forward the day private mortgage insurance stops, because PMI ends when the balance falls far enough against the original value. On a loan with a small down payment that can be worth as much as the interest saved, since the PMI premium disappears from every payment after it. The mortgage calculator shows when PMI stops on the regular schedule; paying extra moves that date earlier.
The same arithmetic works for any amortizing loan. On a car loan or student loan, an extra payment toward principal saves interest at that loan's rate. When you have several debts, put extra money on the highest rate first; that is the avalanche method in the debt payoff calculator.
What the inputs mean
- Loan, rate and term: the balance you borrowed and its rate. For a loan already some years in, use the current balance and the years left.
- Extra each month: added to every payment from the first.
- One-time payment and when: a lump sum in a given month.
Common mistakes
- Draining savings to pay the loan down. Money in the house is hard to get back out in an emergency.
- Paying extra while carrying credit card debt at a much higher rate. Clear that first with the debt payoff calculator.
- Paying a company to run a biweekly plan you can set up yourself.
Extra payment questions
Should I pay extra on my mortgage or invest?
Extra principal earns exactly your mortgage rate, 7.4% at today's average, with no risk. Investing may earn more over long periods but can lose money. Most people first build an emergency fund, take any 401(k) match and pay off higher-rate debt such as credit cards, then decide between the two.
Does paying extra lower my monthly payment?
Not on its own. The required payment stays the same and the loan ends sooner. Some lenders offer a recast: after a large lump sum, for a fee, they recalculate a lower payment over the remaining term.
Can I stop paying extra later?
Yes. Extra payments are voluntary, so you can stop or change them at any time, and the required payment stays where it was. That flexibility is the main advantage over refinancing to a shorter term, which locks in the higher payment.
Is a biweekly payment plan worth paying for?
Paying half the monthly amount every two weeks adds up to one extra payment a year, which on this loan saves $123,452 and ends it 6 years 7 months early. You can get the same result for free by adding a twelfth of a payment each month, so avoid services that charge a fee for it.
Sources
Mortgage rates: Freddie Mac weekly averages as of . How we calculate.