How paying extra shortens a mortgage
A mortgage payment is fixed, but the balance it is applied to is not. Every dollar paid above the required amount reduces the balance immediately, so the next month's interest charge is smaller and a larger share of the same payment goes to principal. The effect compounds: an extra $200 a month on a typical loan removes years from the term, not months.
The table starts from a $250,000 balance with 25 years left at 6.5% — the position many owners are in a few years into a 30-year loan.
| Extra each month | New payment | Paid off in | Remaining interest | Interest saved |
|---|---|---|---|---|
| None | $1,688.02 | 25 yr 0 mo | $256,405 | $0 |
| $100 | $1,788.02 | 21 yr 11 mo | $218,734 | $37,671 |
| $200 | $1,888.02 | 19 yr 6 mo | $191,477 | $64,928 |
| $300 | $1,988.02 | 17 yr 8 mo | $170,668 | $85,737 |
| $500 | $2,188.02 | 14 yr 11 mo | $140,737 | $115,668 |
| $1,000 | $2,688.02 | 10 yr 10 mo | $98,681 | $157,724 |
Paying off by a target date
The calculator can run the question the other way: given the year you want to be mortgage-free, it finds the payment that gets there and reports the difference from your current payment as the extra needed. Aggressive targets cost more than they look, because the required payment rises steeply as the term shortens.
| Pay off in | Required payment | Extra per month | Remaining interest | Interest saved |
|---|---|---|---|---|
| 10 years | $2,838.70 | $1,150.68 | $90,644 | $165,761 |
| 15 years | $2,177.77 | $489.75 | $141,998 | $114,407 |
| 20 years | $1,863.93 | $175.91 | $197,344 | $59,061 |
Timing matters: a lump sum early beats a lump sum late
Interest saved by a prepayment equals the interest that money would have accrued over the rest of the loan. The same $10,000 applied in year one therefore saves several times more than in year twenty, because it has twenty more years of compounding to avoid. If a windfall is coming, earlier is better; if two are coming, the first matters most.
| Applied at | Balance then | Time left after | Interest saved |
|---|---|---|---|
| Start of year 1 | $250,000 | 22 yr 9 mo more | $36,982 |
| Start of year 5 | $231,755 | 19 yr 3 mo more | $26,856 |
| Start of year 10 | $201,176 | 14 yr 8 mo more | $17,081 |
| Start of year 15 | $158,891 | 10 yr 1 mo more | $9,815 |
| Start of year 20 | $100,418 | 5 yr 4 mo more | $4,454 |
Ways people prepay
Several habits produce the same arithmetic. Rounding the payment up to the next hundred is painless and permanent. Accelerated biweekly payments — half the monthly amount every two weeks — produce 26 half-payments, or thirteen full payments a year, which the mortgage calculator's biweekly option models. Applying tax refunds, bonuses or the freed-up payment from a finished car loan as lump sums keeps the monthly budget unchanged.
Whatever the method, tell the servicer the extra is for principal. Some apply unexpected amounts to the next payment, which saves nothing.
When not to prepay
Paying down a mortgage is a guaranteed return equal to the loan rate, after tax if the interest is not deductible for you. That is excellent at 7% and unremarkable at 3%. Before prepaying, clear higher-rate debt, capture any employer retirement match, and hold an emergency fund: money in the house is illiquid, and a home equity line to get it back costs more than the mortgage did. Check for a prepayment penalty, rare on modern conforming loans but present on some others.
- Credit card or other debt above the mortgage rate comes first.
- An employer match is an immediate return no prepayment can beat.
- Keep three to six months of expenses liquid before locking money into equity.
- Read the note for prepayment penalties and any limit on annual extra payments.