Extra mortgage payments: how much they save

Why extra principal saves so much

On a fixed-rate loan, the lender sets the payment so the loan is paid off exactly at the end of the term. If you pay more principal than scheduled, the balance falls faster, the interest charged each month falls, and more of each later payment goes to principal. The effect compounds, so the earlier you start, the more you save.

Different amounts produce different results on the same loan:

These figures assume the extra amount is paid every month from the first payment and applied to principal right away. Starting later saves less, because more interest has already been paid.

Ways to pay extra

• A fixed extra amount each month, added to your regular payment.
• An occasional lump sum, such as from a bonus or tax refund.
• Rounding up, for example paying $2,000 instead of $1,896.
• One extra payment a year, split across months or paid at once.

Be wary of third-party programs that charge a fee to make "biweekly" payments for you. You can usually get the same result by adding one-twelfth of a payment to each monthly payment, at no cost. Ask your servicer how it handles partial or early payments.

Make sure the money goes to principal

Your servicer, which the CFPB describes as the company that processes your payments and tracks principal and interest, decides how to apply what you send based on your loan terms and its procedures. To avoid surprises:

• Use the option to designate extra money as principal, online or on the payment coupon.
• Send extra principal with or after your regular payment, not instead of it.
• Check your next statement. The principal balance should fall by the extra amount plus the scheduled principal.
• If money was held as unapplied funds or applied to a future payment, contact the servicer in writing.

Check for a prepayment penalty

The CFPB explains that a prepayment penalty typically applies only if you pay off the entire balance, for example by selling or refinancing, within a specific number of years, usually three or five. In some cases it could apply to a large lump-sum payment. It does not normally apply to small extra principal payments, but the CFPB advises double-checking with your lender. Your Closing Disclosure states whether your loan has a prepayment penalty.

Extra payments and PMI

On a conventional loan with private mortgage insurance, extra principal brings you closer to the loan-to-value levels at which PMI can be removed. Your loan-to-value ratio is the balance compared with the home's value. Our PMI guide explains the dates and steps.

When other goals come first

Paying down a mortgage is a guaranteed saving at your mortgage rate, but money paid into your home is hard to get back without selling or borrowing. Before adding extra principal, consider:

• An emergency fund. Homeowners face surprise repairs; keep cash available.
• Higher-rate debt. Credit cards and other loans with higher rates usually cost more than your mortgage.
• Retirement savings, especially any employer match.
• Planned home costs, such as a roof or furnace nearing the end of its life.

The bottom line

Extra principal payments cut interest and shorten your loan, and starting early magnifies the effect. On a $300,000 loan at 6.5%, $200 a month saves about $103,000 and nearly seven years. Check for a prepayment penalty, mark extra money as principal, confirm it on your statement and keep emergency savings and higher-rate debt in view first.