Extra payment calculator

Why extra principal saves more than it costs

When you pay an extra $200 in month one of a $400,000 loan at 6.5%, you reduce the outstanding balance by $200. But the effect does not end there. Next month, interest accrues on a balance that is $200 smaller, so the interest charge is slightly lower. That frees up slightly more of your fixed payment to go to principal, which makes next month's balance slightly smaller still, and so on for every remaining month of the loan.

The compounding works in your favor precisely because the mortgage was designed to work against it. A single $200 extra payment in month one of a 30-year loan at 6.5% saves roughly $500 in total interest over the life of the loan — about 2.5 times its face value.

Why timing matters as much as amount

Because interest accrues on the current balance, an extra dollar applied early saves more than an extra dollar applied late. A $5,000 lump sum in month one of the loan above saves roughly $12,500 in interest. The same $5,000 applied in year 20 saves about $2,800. Same dollar amount, same loan, same rate — four and a half times the saving from doing it earlier.

This is why financial advisers who favor prepayment tend to front-load it: the savings from early extra payments compound over the longest possible runway.

What changes and what does not

Extra principal payments shorten the loan and reduce total interest. They do not reduce your required monthly payment. Your servicer will still expect the same fixed amount every month. What changes is how long you pay it. To reduce the required payment, you need a refinance or, on some loans, a recast.

This also means you retain optionality: you are not committed to the extra payment the way you would be if you had taken a 15-year loan with a higher required payment. If your income drops or a large expense arrives, you can stop the extra payment for a month without consequence. That flexibility is worth something.

The honest case against prepaying your mortgage

Prepaying makes most sense when your mortgage rate is higher than the after-tax return you could earn on the alternative use of the money. At current rates that argument is stronger than it was in the sub-4% environment of 2020–2021. But before committing extra principal to the mortgage, consider:

• High-rate debt. Credit card balances at 20%+ cost far more than a 6.5% mortgage saves. Pay those first.
• Emergency fund. Money prepaid into a mortgage is illiquid. If you lose your job and need cash, the bank will not let you withdraw the equity you built up by prepaying — you would need to refinance or sell. Keep three to six months of expenses accessible before prepaying.
• Tax-advantaged retirement accounts. A 401(k) match is an immediate guaranteed return. An IRA contribution compounds tax-free or tax-deferred. The opportunity cost of bypassing those to prepay a mortgage is real and permanent.
• Mortgage-interest deductibility. If you itemize deductions and deduct mortgage interest, the effective cost of your rate is lower than the stated rate. Factor that in when comparing prepayment against other uses.
• Prepayment penalties. A small number of loans — mostly older ones, some non-QM products — carry prepayment penalties. Check your note before sending extra principal.

One thing your servicer may not do automatically