How Extra Mortgage Payments Save You Money
Making extra payments toward your mortgage principal can dramatically reduce your loan term and total interest paid. Even small additional payments add up significantly over time because they reduce the principal balance, which means less interest accumulates on each subsequent payment.
There are several strategies for making extra payments: Extra monthly payments are the most common approach, adding a fixed amount to your regular payment each month. Annual lump sum payments using bonuses or tax refunds can also make a big impact. Some borrowers make biweekly payments (half the monthly payment every two weeks), which results in 13 full payments per year instead of 12.
For example, on a $350,000 mortgage at 6.5% for 30 years, adding just $200/month in extra principal payments can save over $100,000 in interest and pay off the loan approximately 7 years early.
Before making extra payments, check that your lender does not charge prepayment penalties (most modern mortgages do not) and specify that extra payments should be applied to principal, not future payments.
Frequently Asked Questions
How much can I save by paying extra on my mortgage?
The savings depend on your loan amount, rate, and extra payment amount. As a rough guide, adding $200/month to a $350,000 mortgage at 6.5% saves approximately $100,000 in interest and cuts about 7 years off the loan. Even $50-100/month makes a meaningful difference.
Should I make extra payments or invest the money?
This depends on your mortgage rate vs expected investment returns. If your mortgage rate is 6.5%, extra payments effectively earn a guaranteed 6.5% return. If you believe investments will return more after taxes, investing may be better. Many people do a combination of both for diversification.
Are there prepayment penalties?
Most modern conventional, FHA, and VA mortgages do not have prepayment penalties. However, some loans, particularly certain ARMs or non-QM products, may include them. Check your loan documents or contact your servicer to verify before making extra payments.
Should I pay extra toward my mortgage or pay off other debt first?
Generally, pay off higher-interest debt first (credit cards, personal loans) before making extra mortgage payments. Your mortgage is likely your lowest-interest debt and is tax-deductible. However, the guaranteed return of paying off mortgage debt has psychological and financial benefits.
Is it better to make extra monthly payments or one annual payment?
Extra monthly payments are generally slightly better because they reduce the principal sooner, meaning less interest accumulates each month. However, the difference is small. The most important thing is making extra payments consistently, regardless of the timing.