Extra Mortgage Payments: How Much Interest You Really Save

Paying a little more than the required mortgage payment is one of the few financial moves with a guaranteed return: every extra dollar goes straight to principal, and you stop paying interest on it for the rest of the loan. The question is how much it actually matters. This article runs the numbers on a typical loan so you can see the effect in dollars and years, not slogans.

The example loan

All figures below use the same loan: $300,000 borrowed at a 6.5% fixed rate for 30 years. The required monthly payment (principal and interest only, excluding taxes and insurance) is $1,896.20. If you pay exactly that for 360 months, you pay $382,633 in interest – more than the amount you borrowed.

Why extra payments save so much

Mortgage interest is charged on the outstanding balance each month. In the early years most of your payment is interest: in month one of this loan, $1,625 of the $1,896 payment is interest and only $271 reduces the balance. An extra $100 that month cuts the balance by $371 instead of $271 – and that $100 will never be charged interest again for up to 29 more years. That compounding in reverse is why small extra payments early in the loan have an outsized effect.

Monthly extra payments: the numbers

Adding $100 a month – about 5% more than the required payment – removes four years from the loan and saves almost $61,000. At $500 a month the mortgage is gone 12.5 years early. Notice that the savings don't scale linearly: doubling the extra from $100 to $200 saves another $42,000, because each extra dollar shortens the period over which every other dollar is charged interest.

One extra payment a year (the "biweekly" effect)

A popular alternative is paying half the monthly payment every two weeks. There are 26 biweekly periods in a year, so you end up making 13 full payments instead of 12. You get the same result by adding one-twelfth of a payment each month: $158.02 extra on this loan. That pays the mortgage off in 24 years and 2 months and saves $87,256 in interest.

Before signing up for a paid biweekly program, check whether your lender simply holds the half-payments until the full payment is due. If it does, you gain nothing from the timing – only the 13th payment matters, and you can make that yourself for free.

Lump-sum payments

Bonuses, tax refunds and inheritances can go to principal too. A single $10,000 payment in year five of this loan shortens it by exactly two years and saves $37,356 in interest. The earlier the lump sum, the bigger the savings, because the money stops accruing interest sooner.

Before you pay extra: four checks

1. Prepayment penalties. Most standard fixed-rate mortgages allow extra payments without penalty, but some loans, especially outside the US, charge a fee for paying early. Read the "prepayment" clause in your loan agreement.
2. Tell the lender where the money goes. Mark extra amounts as "apply to principal". Otherwise some servicers hold the money as an advance on the next payment, which saves nothing.
3. Emergency fund first. Money sent to the mortgage is hard to get back. Keep three to six months of expenses in cash before accelerating the loan.
4. Compare with other debts and investments. Paying off a 6.5% mortgage is a guaranteed 6.5% return. A credit card at 22% should be paid first; whether investing beats prepayment depends on your expected returns, taxes and risk tolerance.

Run your own numbers

Every loan is different: a 15-year mortgage or a lower rate will show smaller savings, and a higher rate larger ones. Enter your balance, rate and remaining term in the amortization calculator to see your schedule month by month, then compare scenarios with the mortgage calculator.