The Power of Extra Principal Payments
Extra principal payments are additional amounts you pay toward your loan balance beyond the required monthly payment. Every dollar you put toward principal is a dollar that stops generating interest for the remaining life of your loan.
This is one of the most effective strategies for building wealth and achieving financial freedom faster. Even small extra payments can save thousands.
How Extra Payments Work
The Amortization Effect
In a typical mortgage, early payments go mostly toward interest. By making extra principal payments, you skip ahead in your amortization schedule, effectively eliminating future interest charges.
Why Early Payments Matter Most
Impact Examples
| Extra/Month | Interest Saved* | Years Saved |
|---|---|---|
| $100 | $46,000 | 4.5 years |
| $200 | $76,000 | 7.3 years |
| $300 | $97,000 | 9.5 years |
| $500 | $127,000 | 12.8 years |
*Based on $300,000 loan at 6.5% for 30 years
Types of Extra Payments
Monthly Extra
The most consistent approach. Add a fixed amount to each monthly payment and specify it goes to principal.
- Best for: Steady income, disciplined budgeters
- Impact: Compounds monthly savings
- Tip: Automate it so you don't have to think about it
Annual Lump Sums
Apply larger amounts once or twice a year from bonuses, tax refunds, or other windfalls.
- Best for: Variable income, large windfalls
- Impact: Big principal reduction at once
- Tip: Apply as soon as received for maximum impact
One-Time Payments
Inheritance, home sale proceeds, or other large sums can dramatically accelerate your payoff.
| One-Time Payment | Interest Saved* | Payoff Acceleration |
|---|---|---|
| $5,000 | $12,000 | 1 year earlier |
| $10,000 | $22,000 | 2 years earlier |
| $25,000 | $48,000 | 4.5 years earlier |
| $50,000 | $82,000 | 8 years earlier |
*Applied to $300,000 loan at 6.5% in year 1
How to Make Extra Payments
- Confirm no prepayment penalty — Most conventional mortgages allow prepayment, but check your loan documents
- Specify 'apply to principal' — Otherwise lenders may apply to future payments
- Pay at the same time as regular payment — Makes processing easier
- Keep records — Save confirmations showing extra applied to principal
- Verify application — Check your next statement to confirm principal decreased correctly
Common Mistake
Where to Find Extra Money
Easy Wins
- Round up your payment to the nearest $100
- Cancel unused subscriptions and redirect the money
- Apply your next raise entirely to extra payments
- Use cash-back rewards from credit cards
- Sell items you no longer use
Bigger Opportunities
- Apply entire tax refund to principal
- Dedicate work bonuses to mortgage payoff
- Pick up a side hustle for extra income
- Refinance to a lower rate and keep payments the same
- Downsize one vehicle and apply the savings
When NOT to Make Extra Payments
Extra mortgage payments aren't always the best use of money. Consider these alternatives first:
| Priority | Why It Comes First |
|---|---|
| Emergency fund (3-6 months) | Prevents going into debt when emergencies hit |
| Employer 401(k) match | 50-100% immediate return on your money |
| High-interest debt (>10%) | Higher guaranteed return than mortgage payoff |
| HSA contributions | Triple tax advantage beats mortgage interest |
| Roth IRA (if eligible) | Tax-free growth may exceed mortgage rate |
The 5% Rule
Frequently Asked Questions
Q: Is there a prepayment penalty?
A: Most conventional mortgages don't have prepayment penalties, but some older loans or certain loan types might. Check your loan documents or ask your lender.
Q: Should I pay extra or invest the money?
A: If your mortgage rate is above 6%, paying extra is usually better. Below 5%, investing might win mathematically. Between 5-6%, it depends on your risk tolerance. There's also psychological value in being debt-free.
Q: Do extra payments lower my monthly payment?
A: No. Your required monthly payment stays the same. Extra payments reduce the number of payments you'll make and the total interest paid. Some lenders offer recasting (for a fee) to lower monthly payments after extra payments.
Q: Can I get my extra payments back if I need them?
A: No. Once you pay principal, you can't withdraw it like a savings account. If you might need access to the money, keep it in savings instead.
Q: Should I refinance instead?
A: If rates have dropped significantly (usually 1%+ below your current rate), refinancing may save more than extra payments. Use a refinance calculator to compare.
Q: What about biweekly payments instead?
A: Biweekly payments result in one extra payment per year. Extra monthly payments can be more flexible and potentially more impactful if you can afford more than one extra payment per year.
Your Action Plan
- Use this calculator to see your potential savings
- Verify your loan has no prepayment penalty
- Decide on your extra payment amount and frequency
- Set up automatic extra payments if possible
- Track your accelerated payoff progress
- Celebrate when you hit milestones!
Results are estimates based on the inputs provided. Actual savings depend on your specific loan terms, when payments are applied, and how your lender processes extra payments. Always verify with your lender that extra payments are being applied to principal as intended.