Why extra principal is so powerful early
Every extra dollar you send to principal removes all the future interest that dollar would have accrued for the rest of the loan. Early in a 30-year mortgage, a $1 prepayment can eliminate several dollars of future interest. Late in the loan, it eliminates almost none. That is why an extra $250 a month starting in year 2 has a dramatically different effect from the same $250 starting in year 20.
A concrete example
Take a $320,000 balance at 6.5% with 28 years left. The scheduled payment is roughly $2,047 and total remaining interest is about $368,000. Add $250 a month and the loan retires in roughly 22 years instead of 28, saving somewhere near $95,000 in interest. The extra outlay over those 22 years is around $66,000 — so the money worked out to a risk-free return well above what a savings account pays.
Four ways to prepay
- Fixed monthly extra. Simplest and easiest to automate. Round the payment up to the next hundred and forget about it.
- Biweekly. Half payments every two weeks produce one extra full payment per year. Watch out for servicers that charge a setup fee — you can replicate it yourself for free.
- Annual lump sum. Direct a tax refund or bonus at the principal once a year. Slightly less effective than spreading it monthly, but easier to commit to.
- Recast. Some servicers will re-amortize your loan after a large lump sum, lowering the required payment while keeping the original term. Useful if you want cash-flow relief rather than a shorter term. Fees are typically $150–$500.
The one rule: label the payment
If you send extra money without instructions, many servicers apply it to next month's payment instead of the balance. That means it earns you nothing. Use the "additional principal" field in your servicer's online portal, or write "apply to principal only" on the check, and verify on the next statement that the balance moved.
When not to prepay
Prepaying is the wrong move if you have no emergency fund — home equity is illiquid and cannot be withdrawn at short notice without a HELOC or cash-out refinance, both of which take weeks and cost money. It is also the wrong move if you carry higher-rate debt or are forgoing an employer 401(k) match, which is an immediate 50–100% return. If your mortgage rate is below roughly 4%, the arithmetic often favours investing the difference instead.
The tax angle
Since the 2017 standard deduction increase, the large majority of US households no longer itemise, which means their mortgage interest produces no tax benefit at all. If that describes you, the "but I lose the deduction" objection to prepaying does not apply. Check your last return before assuming otherwise.