How Extra Mortgage Payments Work
Making extra payments toward your mortgage principal can dramatically reduce the total interest you pay and help you own your home sooner. Each extra payment goes directly toward reducing your principal balance, which means less interest accrues over time. Even small additional payments can save thousands of dollars over the life of your loan.
The Power of Extra Payments
Consider a $250,000 mortgage at 6.5% interest over 30 years. Your regular monthly payment would be about $1,580. By adding just $200 extra each month, you could save approximately $82,000 in interest and pay off your mortgage 7 years and 3 months earlier. The savings compound because you reduce the principal faster, which means less interest charges on future payments.
Different Ways to Make Extra Payments
Extra monthly payments: Add a fixed amount to each monthly payment. This is the most straightforward approach and builds savings automatically. Annual lump sum: Make one large payment per year, perhaps using a tax refund or bonus. One extra payment per year: Make 13 payments instead of 12 annually, often by paying half your mortgage every two weeks (26 half-payments equals 13 full payments). Round up payments: Round your payment to the nearest hundred or add a set amount like $50-100 each month.
When Extra Payments Make Sense
Extra payments work best when you have high-interest debt paid off, an emergency fund established, and stable income. They're most impactful early in your loan term when interest charges are highest. If you're within 5-10 years of paying off your mortgage, the savings are smaller but can still be worthwhile. Consider your other financial goals—extra payments may be less beneficial than maxing out retirement contributions or other investments, especially if your mortgage rate is low.
Verify Principal-Only Payments
Ensure your lender applies extra payments correctly—they should reduce principal, not prepay future interest or next month's payment. Most lenders have a "principal only" payment option online or require you to specify "apply to principal" on your check. Some lenders charge prepayment penalties, though these are rare on modern mortgages. Review your loan documents or contact your servicer to confirm there's no penalty before making extra payments.
Tax Implications of Early Payoff
Paying off your mortgage faster reduces your mortgage interest deduction if you itemize taxes. However, the tax benefit is often overstated—you only save your marginal tax rate on the interest paid. For example, if you pay $10,000 in interest and your tax rate is 22%, you save $2,200 in taxes but still spent $10,000. It's almost always better to pay less interest overall. Use our mortgage payment calculator to estimate your annual interest costs.
Calculating Your Break-Even Point
Consider alternative uses for extra payment money. If your mortgage rate is 6.5% but you could earn 8% in a diversified investment portfolio, investing might build more wealth long-term. The guaranteed "return" of paying down your mortgage equals your interest rate. Many financial advisors suggest paying extra on mortgages above 5-6% and investing if rates are lower. Personal factors matter—peace of mind from being debt-free has real value that pure math can't capture.
Extra Payment Strategies
Start small and increase gradually—even $25-50 per month makes a difference. Automate extra payments so they happen without effort. Use windfalls strategically—apply raises, bonuses, or tax refunds to principal. Consider biweekly payments if your lender offers them, which results in one extra payment annually. Track your progress—watching your principal decrease faster is motivating. Recalculate annually to see how much time and money you've saved.
If you're considering purchasing a new home or refinancing, use our mortgage affordability calculator to determine your budget, or check out our mortgage payoff calculator to plan your debt-free timeline.