Paying off your mortgage faster by making additional principal payments can generate huge savings over the life of your loan. Even small, consistent extra mortgage payments add up in a big way, allowing you to pay less interest, build equity quicker, and reduce your term dramatically.
What Are the Benefits of Extra Mortgage Payments?
There are several key advantages to paying extra toward your mortgage principal:
Save Thousands in Interest
The bulk of your regular mortgage payment goes toward interest in the early years. By making extra payments, more money is applied directly to the principal balance rather than interest. This reduces the total interest owed over the full term.
For example, on a $300,000 loan at 4% interest, paying an extra $100 per month can save over $30,000 in interest charges. Bigger extra payments save exponentially more in interest expenses.
Pay Off Your Mortgage Years Earlier
When you pay additional principal, you’re shortening the lifetime of your loan by making the payoff date arrive sooner. Each extra payment you make brings you closer to owning your home free and clear.
Depending on the size of your extra payments, you may be able to shave 5, 10, or even 15 years off a 30-year term. The sooner you begin making extra payments, the bigger the impact you’ll see.
Build Home Equity Faster
Home equity is the portion of your home’s value that you actually own, separate from the mortgage lender’s stake. Extra mortgage payments build equity quicker by paying down what you owe the lender.
More equity gives you financial flexibility, such as tapping into it later via a home equity loan or line of credit. And it positions you for a better sale price when you eventually sell the home.
Improve Your Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares your monthly debt payments to your gross monthly income. The lower your DTI, the better when applying for future loans and credit.
By owing less on your mortgage due to extra payments, you lower your DTI ratio. This can help you qualify for the best possible terms on future borrowing needs.
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How Much Could Extra Payments Save?
The interest savings and term reduction achieved by extra mortgage payments depend on variables like:
- Original loan amount
- Interest rate
- Extra payment amounts
- Payment frequency
- Years remaining on the term
Generally, the larger your extra payments and the sooner you start making them, the more dramatic effect they’ll have. Even small extra payments can generate substantial savings, given enough time.
You can use an extra payment calculator to estimate your potential savings for different payment scenarios.
For example, on a $300,000 loan at 4% interest:
- Extra $100/month saves $32,700 in interest and pays off the loan 4 years sooner
- Extra $200/month saves $62,800 in interest and pays off the loan 7 years sooner
- Extra $500/month saves $99,600 in interest and pays off the loan 10 years sooner
Ways to Make Extra Mortgage Payments
There are a few simple methods for paying extra toward your mortgage principal:
Add to Your Regular Monthly Payment
Determine an extra amount you can afford per month, such as an additional $100 or $200. Have this transferred from your checking account along with your normal payment.
Instruct your lender to apply the overage specifically to the principal. This ensures it shortens your term rather than just prepaying future payments.
Make an Extra Payment Annually
Rather than small monthly additions, you may opt to make one additional principal payment a year. Target an annual windfall like a bonus or tax refund to put toward this lump sum payment.
Some lenders let you set up an automatic yearly payment for convenience. Just pick the date you want the extra principal payment to be made each year.
Increase Your Payment Frequency
Opting for biweekly mortgage payments rather than monthly payments is an easy way to achieve an extra payment each year.
There are 26 biweekly pay periods annually, so with your normal monthly payment split in half and paid biweekly, you end up making 13 equivalent monthly payments per year.
Recast the Loan
Some lenders allow you to “recast” your mortgage after making a large lump-sum payment, such as from an inheritance. The lender will re-amortize the balance over the remaining term with lower monthly payments.
This doesn’t shorten the term, but it does save interest. Check if your lender offers recasting and the qualifications to do so. There may be fees involved.
Tips for Affording Extra Mortgage Payments
Finding room in your budget for those additional principal payments involves some strategizing. Here are tips to free up cash flow for your mortgage:
- Downsize expenses – Critically evaluate your spending and look for areas to cut back on, such as dining out, subscriptions, or other non-essentials. Any savings add up.
- Earn more income – Consider a side gig or freelance work to generate supplementary earnings that can be applied to extra mortgage payments.
- Reduce debt payments – Pay off credit cards and other high-interest debts to redirect those funds to your mortgage principal.
- Lower your interest rate – Refinancing to a lower rate means more of your payment goes to principal. But don’t extend your term in the process.
- Automate payments – Set up automated transfers to effortlessly direct bonuses, tax refunds or a portion of your paycheck toward extra principal each month.
When Might Extra Mortgage Payments Not Make Sense?
While extra payments are usually smart, they aren’t right for everyone in every situation. Consider holding off if:
- You need cash savings for an emergency fund or other goals first
- You plan on moving soon and won’t recoup the interest savings
- You can earn a higher return by investing extra cash instead
- Refinancing would save more money than extra payments would
- You have higher interest debts to pay off first
Analyze your full financial picture and goals before deciding to earmark extra money for your mortgage principal.
The Bottom Line
Paying extra toward your mortgage principal each month is one of the smartest financial moves homeowners can make. Even small, consistent amounts add up to huge interest savings and a shortened loan term over time.
Crunch the numbers to estimate your potential savings and timeline based on different payment amounts. Come up with a payment plan that fits comfortably within your budget. Stick to it and watch your mortgage finish years earlier than originally scheduled.
Frequently Asked Questions
How much should I pay extra each month?
Aim for at least an extra $100 per month if possible. Determine the maximum amount you can afford each month without compromising your other financial goals and emergency savings. Every extra dollar toward the principal counts.
When will extra payments shorten my term?
It takes time for extra principal payments to begin shortening your remaining loan term. Payments first go toward the interest due that month. Only once that interest is paid does the overage reduce your principal balance. But stick with it, and you’ll see the term decrease.
Can I skip normal payments if I pay extra?
No, you still need to make the minimum required monthly payments per your agreement. Extra payments are voluntary additions to help pay off the loan faster.
Are there tax benefits to extra mortgage payments?
Not directly. However, the interest savings and faster payoff can move you more quickly into owning your home free and clear. At that point, you’ll no longer have interest payments to deduct from your taxes annually.
How soon before closing should I stop extra payments?
Consult your lender, but generally, you’ll want to discontinue extra mortgage payments a month or two before closing on a home sale. This ensures your loan balance aligns with the figures on your closing disclosure paperwork.
Can I deduct the points paid at closing over time?
Yes, you can deduct points paid upfront at mortgage closing over the life of the loan. Each year, you can deduct a portion of the points based on the interest paid that year. This helps offset some of the higher payments at the start.
In another related article, Experts 2025 Mortgage Rate Predictions
