Every extra dollar you put toward a mortgage stops interest from being charged on that dollar for the rest of the loan. That is why small, early prepayments save so much more than you would expect. This guide compares the main methods on the same loan so you can see what each one is actually worth, then covers the situations where paying the mortgage off early is not the best use of your money.
The example loan
All the figures below use a 280,000 dollar, 30-year fixed mortgage at 6.5%. The principal and interest payment is about 1,770 dollars a month, and over 30 years the borrower pays about 357,000 dollars in interest, more than the amount borrowed. You can reproduce every number with the mortgage calculator or the amortization calculator.
1. Add a fixed amount to every payment
This is the simplest method and the easiest to stick to, because it becomes part of your monthly routine.
- An extra 100 dollars a month pays the loan off in about 25.8 years and saves about 60,000 dollars of interest.
- An extra 200 dollars a month: about 22.8 years and 101,000 dollars saved.
- An extra 500 dollars a month: about 17.1 years and 174,000 dollars saved.
The savings are not proportional. Five times the extra payment does not save five times as much, because the faster the balance falls, the less interest there is left to save. The first hundred dollars a month is the best value of all.
2. Pay every two weeks
A biweekly plan means paying half your monthly payment every two weeks. A year has 52 weeks, so you make 26 half payments, the equivalent of 13 monthly payments instead of 12. On the example loan, that clears the mortgage in about 24.2 years and saves around 82,000 dollars.
Two cautions. Some lenders hold half payments until the full amount arrives, which removes most of the benefit, and some third-party biweekly services charge setup or monthly fees. You get virtually the same result by adding one twelfth of your payment, about 148 dollars here, to each monthly payment: about 24.2 years and 81,000 dollars saved, with no special arrangement.
3. Make an extra payment from a windfall
A tax refund, a bonus or an inheritance can go straight to principal. A single 10,000 dollar payment early in the example loan, with the regular payment unchanged, takes about three years off the term and saves about 53,500 dollars of interest. The earlier in the loan a lump sum arrives, the more it saves.
4. Recast the loan
A recast is different: you pay a lump sum and the lender recalculates your monthly payment over the remaining term, instead of shortening the loan. Putting 10,000 dollars toward the example loan and recasting would lower the payment from about 1,770 to about 1,707 dollars. Lenders usually charge a modest fee and set a minimum lump sum, and many government-backed loans, such as FHA and VA mortgages, cannot be recast. Choose a recast when lower monthly costs matter more to you than an earlier payoff date.
5. Refinance to a shorter term
If rates have fallen, or your credit has improved, refinancing into a 15 or 20-year loan combines a lower rate with a much faster payoff. The catch is closing costs, commonly 2 to 5% of the loan, so you need to keep the loan long enough to recover them. The refinance calculator shows the break-even point and the total interest under both loans. Be careful with refinancing into a new 30-year loan late in your current one: the payment falls, but you may pay more interest overall because the clock restarts.
6. Round up
Rounding a 1,770 dollar payment up to 1,800 or 1,900 is a painless way to start. It is method 1 with a number that feels natural, and it adds up the same way.
Make sure the extra money reaches the principal
When you pay more than the amount due, tell your servicer to apply the extra to principal. Most online payment pages have a separate principal field. Otherwise, some servicers treat the extra as an early payment of next month's bill, which saves nothing. Check your next statement to confirm the balance fell by the full extra amount.
Most US mortgages have no prepayment penalty. Federal rules since 2014 only allow one on certain fixed-rate qualified mortgages, capped at 2% of the balance in the first two years and 1% in the third, and banned after that. Your closing documents say whether yours has one.
When paying the mortgage off early is not the best move
- You have higher-interest debt. A credit card at 22% costs far more than a mortgage at 6.5%. Clear that first; the debt payoff calculator helps plan it.
- You have no emergency fund. Money paid into a mortgage is hard to get back out in a crisis. Keep three to six months of expenses in cash first.
- You are missing an employer match. A retirement plan match is an instant return no mortgage prepayment can beat.
- Your rate is low. If your mortgage is at 3%, long-run investment returns have historically been higher, so investing the extra may grow your wealth more. The guaranteed saving from prepaying is still worth something, especially if you value being debt-free before retirement.
The short version
Start with whatever extra you can sustain every month, even 100 dollars, and make sure it goes to principal. Add windfalls when they come. Consider refinancing only when the break-even point is well inside the time you expect to keep the loan. Run your own numbers in the mortgage calculator, which shows the new payoff date and the interest saved as you change the extra payment.
Estimates only, not financial advice. Figures assume a fixed rate and that extra payments are applied to principal when made.