What an Extra Mortgage Payment Really Buys You
Small extra payments buy shocking amounts of time and interest, because they attack principal when interest is highest.
On a $300,000, 7%, 30-year loan: an extra $100/month saves about $69,000 and 4.2 years; $200/month saves about $117,000 and 7.1 years; $500/month saves about $200,000 and 12.7 years. Extra principal earns your mortgage rate, risk-free.
The math at three levels
Take a $300,000 loan at 7 percent with a $1,996 principal-and-interest payment. Baseline: 360 months, about $418,000 in total interest. Add $100 a month: payoff drops to 310 months (25.8 years), saving about $69,000 in interest. Add $200: 275 months (22.9 years), saving about $117,000. Add $500: 208 months (17.3 years), saving about $200,000.
Notice the curve flattens: the first $100 buys more than the fifth. Diminishing returns set in because later extra dollars attack a smaller balance.
Why early dollars matter most
In month one, $1,750 of the $1,996 payment is interest. An extra $200 then kills $200 of principal that would otherwise accrue 7 percent for 30 years. The same $200 in year 25 kills principal that had only a few years of interest left in it. Front-load your aggression.
How to make sure it counts
Write to your servicer specifying that extra amounts apply to principal. Otherwise some servicers park partial extra payments in a suspense account until they total a full payment, or treat them as early payment of next month's bill, which does not reduce principal the same way. Check a statement after your first extra payment to confirm the principal dropped.
When not to pay extra
If you carry credit card debt at 20 percent, every extra dollar earns more there. If you have no emergency fund, liquidity beats a slightly smaller mortgage balance. And if your employer matches 401(k) contributions, the match is an instant 50 to 100 percent return that no prepayment beats.
Skip the arithmetic
Enter your own balance and extra amount to see your exact savings.
Extra payment questions
How much extra should I pay on my mortgage?
Pay what you can sustain consistently. Even $100 a month on a typical $300,000 loan saves around $69,000 in interest and 4.2 years.
Is it better to pay extra monthly or annually?
Monthly extra payments save slightly more than an equal annual lump sum, because the principal falls a little sooner each month. Either approach beats paying the minimum.
Can extra payments shorten my loan term?
Yes. Extra principal payments do not change your contract term, but the loan amortizes to zero years ahead of schedule.
Do I need to tell my lender about extra payments?
Yes. Instruct your servicer in writing to apply extra payments to principal, and verify on your next statement that the principal balance dropped accordingly.