How it works
An extra principal payment is any amount paid above the required installment with instructions to apply it directly against the loan's balance — and it is the rare guaranteed investment in personal finance, because every prepaid dollar stops accruing interest at exactly your mortgage rate, tax-free, forever. The mechanics reward consistency over heroics: because early-year payments are mostly interest, principal added in the first half of a loan works disproportionately hard. This simulator runs two parallel amortizations from your actual position — the contractual schedule versus one carrying your chosen monthly extra plus an annual lump — and reports the gap in dollars and time. The defaults show the pattern's power: $200 monthly plus a $1,000 yearly bonus against a $310,000 balance at 6.25% erases roughly six figures of interest and shaves multiple years off a 26-year term. Two disciplines protect the result. First, earmark payments explicitly — servicers occasionally park unlabeled extras as future-payment credits that save nothing. Second, respect sequencing: employer-match retirement dollars and any high-interest debt outrank 6% returns, and an unfunded emergency fund makes aggressive prepayment fragile. Past those gates, the schedule below shows the snowball widening year by year — patience compounding at a rate no savings account matches.
Formula
New duration solves: balance amortized at (regular + extra + annual lump/12 equivalent) | Savings = baseline interest − accelerated interest
Tips
- Mark every extra payment 'apply to principal' and verify on the next statement.
- Early extras outperform late ones — front-load the habit while interest dominates.
- Clear debts above the mortgage rate first; the ordering is pure arithmetic.
- Capture the full employer match before prepaying even a single dollar.
- Automate the annual lump alongside your bonus before spending it.
Frequently asked questions
- How much does paying an extra $200 a month save on a mortgage?
- On a $310,000 balance at 6.25% with 26 years left, $200 monthly plus $1,000 yearly saves roughly six figures of interest and cuts four-plus years off the term. The exact figure scales with your rate — higher-rate mortgages reward prepayment proportionally more.
- Is it better to pay extra monthly or once a year?
- Monthly wins slightly, because principal removed earlier stops accruing sooner: $100 monthly beats $1,200 each December by a modest margin. The practical answer honors behavior — automate whichever rhythm you will actually sustain, since a perfect annual plan that never happens loses to a humble monthly transfer that does.
- What return do extra mortgage payments earn?
- Exactly your mortgage rate, guaranteed: 6.25% here, untaxed and riskless. Matching that elsewhere currently requires meaningful risk, and beating it requires accepting volatility. The comparison sharpens further after tax — taxable investments must outearn the rate by your marginal bracket just to tie.
- Should I invest instead of prepaying my mortgage?
- Historical equity returns exceed typical mortgage rates, but with volatility, taxes and discipline requirements the guarantee doesn't carry. Balanced practice: capture full employer match, hold an emergency fund, clear high-rate debt, then split surplus between prepayment and investing according to how you sleep — not just spreadsheets.
- Why didn't my extra payment reduce my balance?
- Most likely the servicer applied it as an advance toward next month's payment — which saves nothing. Some lenders require separate transactions, online 'principal-only' options, or memo lines. Verify the following statement shows the principal reduction; persistence here is worth hundreds in otherwise forfeited interest.