How Extra Mortgage Payments Work
Extra payments go directly toward your principal balance, reducing the amount that accrues interest. This creates a compounding effect — each extra dollar saves more than its face value in interest over the remaining loan term.
Extra Payment Strategies
- Monthly extra: Add a fixed amount to each payment. Even $100-200/month makes a significant difference
- Annual lump sum: Apply tax refunds, bonuses, or windfalls once a year. A $3,000 annual payment equals $250/month
- One-time payment: Apply an inheritance or savings immediately to reduce principal
- Biweekly payments: Pay half your monthly payment every two weeks. Since there are 52 weeks/year, you make 26 half-payments = 13 full payments instead of 12
Example: $300,000 Mortgage at 6%, 30 Years
| Strategy | Monthly Cost | Time Saved | Interest Saved |
|---|---|---|---|
| Normal payments | $1,799 | — | — |
| +$100/month extra | $1,899 | 5 yrs, 1 mo | $51,500 |
| +$200/month extra | $1,999 | 8 yrs, 7 mos | $84,300 |
| +$500/month extra | $2,299 | 14 yrs, 4 mos | $139,600 |
| Biweekly payments | ~$1,949 | 5 yrs, 3 mos | $53,400 |
When to Pay Off Your Mortgage Early
Good reasons to pay early
- Your mortgage rate is higher than what you'd earn investing (generally above 5-6%)
- You've already maxed out tax-advantaged accounts (401k, IRA, HSA)
- You value the security and peace of mind of being debt-free
- You're close to retirement and want to reduce fixed expenses
Reasons to invest instead
- Your mortgage rate is low (under 4%) and the market averages 7-10% returns
- You have higher-interest debt (credit cards, student loans)
- You don't have an adequate emergency fund (3-6 months expenses)
- You can deduct mortgage interest on taxes (less relevant after 2017 tax reform)
Biweekly vs Monthly Payments
Biweekly payments work because there are 52 weeks in a year, so 26 biweekly payments equal 13 monthly payments instead of 12. That extra payment goes entirely to principal. On a 30-year mortgage, biweekly payments typically save 4-6 years and tens of thousands in interest — with minimal monthly impact on your budget.
Important: You must set up biweekly payments directly with your lender (or a reputable third-party service). Simply paying half your mortgage mid-month doesn't help unless the extra is applied to principal.