What's the Advantage of Making Extra Mortgage Payments?

It's possible to save thousands of dollars by prepaying your mortgage. Prepayments to principal, the amount you owe on your mortgage, reduces the amount of interest owed. Here's an example: If you take out a 30-year fixed-rate mortgage for $200,000 at 5.50 percent, your monthly principal and interest payment would be $1,135.58. If you added an additional $240.19 to each payment, starting with your first payment, you would pay off your mortgage in 20 years. Compared to paying your mortgage off in 30 years, you could save $78,622.17 in interest.

Loan Amortization

Amortization is the process by which a fixed-rate mortgage is paid off over time. With each payment of principal and interest, a little more is applied to the loan balance and a little less to interest.

Reducing Interest

By reducing your mortgage balance faster, you reduce the interest owed on your mortgage. Paying a few dollars extra a month can help you save on interest.

Time and Money

A mortgage amortization schedule shows how little is applied toward your loan balance during the first few years of repaying your mortgage. The shorter your repayment term, the less interest you'll pay.

Extra Principal Payments

If you pay extra toward your mortgage balance, make sure to specify "additional principal payment" for the extra amount when paying your mortgage. Otherwise, the extra funds may be applied to your escrow account, which won't reduce your mortgage interest.

Payment Flexibility

You can initially choose a mortgage with a shorter repayment term, but this requires making higher monthly payments. Choosing a 30-year loan and making principal payments when feasible allows you to decide if and when to pay additional principal.