How Extra Payments Work

When you make an extra payment, you specify that it should be applied to the principal balance. This reduces the amount you owe, which means less interest accrues each month. The earlier you make extra payments, the more interest you save because the principal is reduced for the remaining life of the loan.

Interest Savings Over Time

On a $300,000 loan at 6.5%:

One extra payment per year: Saves $70,000 in interest, pays off the loan 6 years early.

An extra $100/month: Saves $50,000 in interest, pays off the loan 4 years early.

An extra $500/month: Saves $150,000 in interest, pays off the loan 12 years early.

When to Make Extra Payments

• When your rate is above 5% — The savings are substantial and predictable
• When you want to be debt-free — Paying off your mortgage early provides peace of mind
• When you have extra cash flow — Bonuses, tax refunds, or side income
• When you are close to retirement — Eliminating your mortgage payment reduces monthly expenses

When to Invest Instead

• When your rate is below 4% — You can likely earn more in the market
• When you have higher-interest debt — Pay off credit cards or student loans first
• When you lack emergency savings — Build a 3-6 month emergency fund first
• When you are not maxing out retirement accounts — 401(k) matching and IRA contributions typically outperform mortgage prepayment

How to Set Up Extra Payments

Most lenders allow you to make extra payments online. Specify that the extra amount should be applied to principal. You can also set up bi-weekly payments (half the monthly payment every two weeks), which results in 26 half-payments per year, or 13 full payments. This is one extra payment per year, done automatically.