Consider Making One Extra Mortgage Payment A Year
What if you could pay off your 30-year mortgage more than six years early—and save more than $225,000 in interest—without refinancing?
Most homeowners assume that a 30-year mortgage means 30 years of payments. There’s an easy way to dramatically shorten that timeline and save significant money: make one additional mortgage payment each year and apply the entire amount directly toward your loan principal (more on that later).You don’t have to come up with a large lump sum in a single month, either. You can spread that extra payment over 12 months, or simply contribute whatever additional amount your budget allows, when it allows.
How Much Could You Actually Save?
Let’s say you purchase a home for $800,000, make a 20% down payment, and finance the remaining $640,000 with a 30-year fixed-rate mortgage at 7.25%. Your monthly principal and interest payment would be approximately $4,366, excluding property taxes and homeowners insurance.
Here’s what happens if you make one or two extra payments each year, applying the additional money entirely toward principal.
| Payment strategy | Mortgage paid off in | Time saved | Monthly payments eliminated | Interest saved |
|---|---|---|---|---|
| Regular payments only | 30 years | — | — | — |
| 1 extra payment/year | 23 years, 9 months | 6 years, 3 months | 75 | $227,061 |
| 2 extra payments/year | 20 years | 10 years | 120 | $355,350 |
Calculations assume a $640,000 mortgage at a fixed 7.25% interest rate over 30 years, with extra principal payments made at the end of each 12-month period beginning in the first year. Figures are rounded.
Think about that. Just one extra payment per year could eliminate more than six years of mortgage payments and save approximately $227,000 in interest. Two extra payments a year could eliminate an entire decade of payments and save more than $355,000!
Why/How Does This Work?
Every regular mortgage payment has two components:
- Principal: The amount that reduces what you owe on your mortgage.
- Interest: The amount your lender charges you for borrowing the money.
During the early years of a 30-year mortgage, a substantial portion of each monthly payment goes toward interest rather than reducing the principal. When you make an additional payment directly toward principal, you immediately lower your outstanding loan balance. Because future interest is calculated on that remaining balance, you’ll pay less interest going forward. As a result, more of each subsequent regular payment goes toward principal, helping you pay off the loan even faster. So the earlier you start, the greater the potential savings.
Your Extra Payment Won’t Include Taxes or Insurance
Most banks roll in the homeowner’s insurance and property taxes in the monthly payment (the entire amount that comes out of your account each month). However, to calculate an extra annual mortgage payment, use only the principal and interest portion—exclude the amount you pay toward taxes and insurance.
For example, suppose your monthly payment consists of:
| Payment component | Monthly amount |
|---|---|
| Principal and interest | $4,366 |
| Property taxes and insurance | $1,200 |
| Total monthly payment | $5,566 |
In this example, if you wanted to make an extra payment equal to one month’s principal and interest, that amount would be $4,366, not $5,566. Although $4,366 represents your normal monthly principal and interest payment, the entire extra $4,366 should go toward principal. To clarify, paying down your mortgage faster doesn’t reduce your property taxes or homeowners insurance. The savings come from reducing the interest you pay on your loan.
Make Sure Your Extra Payment Goes Toward Principal Only
This is where homeowners need to be particularly careful. Don’t assume that sending extra money to your mortgage company automatically means it will be applied directly to your principal balance.
If you don’t specify, some lenders will automatically apply any extra payments toward a future monthly installment rather than immediately reducing your outstanding principal. That method helps them, but not you. You want the extra money to reduce the balance on which future interest is calculated.
When making an additional payment, look for an option labeled:
- Additional Principal
- Principal Only
- Principal Reduction
If you don’t see one, contact your mortgage servicer to find out how to designate an additional principal payment. Ask to have this additional payment applied entirely toward reducing the principal balance of my mortgage. Indicate is it not to be applied toward any future monthly payment.
Then check your mortgage statement to confirm that the extra payment was credited correctly.
Three Easy Ways to Make Extra Mortgage Payments
You can choose whichever approach works best for your budget and keep in mind that what makes sense one year might change at a future point.
Option 1: Make one extra payment each year.
Using our example, you would make your 12 regular monthly payments and then submit an additional $4,366 once a year, designated entirely toward principal.
Option 2: Spread the extra payment over 12 months.
If coming up with an additional $4,366 all at once seems daunting, divide that amount by 12. That’s approximately $364 extra per month. Pay that amount in addition to your regular monthly mortgage payment, with the extra money designated as only principal. (In fact, making additional principal payments monthly can save slightly more interest than waiting until the end of the year to make one lump-sum payment, because you’re reducing your loan balance sooner.)
Option 3: Make two extra payments each year.
If your budget allows, consider making two additional principal payments annually. In our example, that means contributing approximately $8,732 extra per year, or $728 per month if spread across 12 months.
Option 4: Pay what you can, when you can.
There’s nothing magical about making an extra payment exactly equal to one month’s principal and interest. That’s simply a convenient way to illustrate the potential savings. You can make additional principal payments in any amount that works for your budget, subject to your loan’s terms. Maybe one year, it’s $2400 and the next, it’s $4567. And, again, the payments can be in a lump sum, or a bit each month (or just the months you can find some extra cash). The amount doesn’t have to match your regular monthly payment, and you don’t have to contribute the same amount every time.
How Do You Set This Up With Your Mortgage Company?
The process is usually straightforward, although procedures vary by mortgage servicer.
- Log in to your mortgage account. Look for an option to make additional principal payments. Many servicers include this on their online payment pages.
- Find out whether you can automate the payments. Some servicers allow you to schedule recurring additional principal payments along with your regular monthly payment.
- If you’re unsure, call your servicer. Ask specifically how to make recurring principal-only payments and whether the system will automatically apply them correctly.
- Confirm that the payments won’t simply advance your due date. You want the additional money to reduce your loan balance immediately.
- Check your statements. Review your account after the first additional payment to confirm that it was applied toward principal only.
Remember that your mortgage servicer may not be the same company that originally issued your mortgage. Contact the company that currently collects your payments. Also, review your loan documents for any applicable prepayment penalties or restrictions. Most conventional residential mortgages today don’t have prepayment penalties, but it’s worth confirming.
The Bottom Line
You don’t have to refinance your mortgage or make enormous additional payments to significantly reduce the total cost of borrowing. As the example shows, making just one extra principal payment each year could save more than $225,000 in interest and eliminate more than six years of mortgage payments.
And remember, you don’t have to make an entire extra monthly payment to benefit. Whether it’s $100 a month, $3,400 from a year-end bonus, or whatever amount you can comfortably afford, additional principal payments can make a meaningful difference over time.
The secret isn’t simply paying extra. It’s making sure that every additional dollar goes directly toward reducing your principal balance. A relatively small adjustment to your monthly budget today could make an enormous difference to your financial future.
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