How Extra Payments Reduce Loan Costs
Every dollar you pay beyond your required monthly payment goes directly to reducing your principal balance. A lower principal means less interest accrues in subsequent months, which means more of each future payment reduces principal. Even modest extra payments can significantly reduce your total interest and shorten your loan term.
The Impact of Extra Payments on a 30-Year Mortgage
On a $350,000 mortgage at 7% with 30 years remaining, the standard monthly payment is approximately $2,329. Paying an extra $200 per month reduces the loan term by approximately 5 years and saves approximately $82,000 in total interest. Paying an extra $500 per month reduces the term by approximately 10 years and saves approximately $168,000.
Lump Sum Payments
A single $10,000 lump sum applied to principal on a $300,000 mortgage at 6.5% can save approximately $23,000 in total interest over 30 years, even without any additional monthly overpayment.
Before Making Extra Payments
Confirm your loan has no prepayment penalty (most mortgages originated after 2014 do not, due to CFPB Qualified Mortgage rules). Also consider whether paying down a high-rate mortgage outweighs other uses of that money, such as eliminating higher-rate debt or building an emergency fund.