How One Extra Mortgage Payment a Year Cuts Your Loan Short
What One Extra Payment Does to Your Loan
Making one extra mortgage payment per year—either as a lump sum or split into monthly additions—shortens the life of your loan and reduces the total interest you pay. A single extra payment goes entirely toward principal because your regular payment already covers that month's interest. Over the life of a 30-year mortgage, one extra payment per year can cut 4 to 6 years off the loan and save tens of thousands in interest, depending on your loan amount and rate.
The math is straightforward: if you owe $300,000 at 6% interest, that extra payment reduces what you owe the next month, which means less interest accrues on a smaller balance. That smaller balance compounds month after month. You are not paying down faster because you are paying more total—you are paying down faster because the extra principal stops interest from growing on that amount for the remaining years of the loan.
Key Takeaways
- One extra mortgage payment per year goes entirely to principal and can shorten a 30-year loan by 4 to 6 years.
- You can make the extra payment as a single lump sum, split it into twelve smaller additions, or pay half a payment every two weeks—all produce similar results.
- Check your loan documents or contact your lender before sending extra money to confirm there is no prepayment penalty and that the payment will be credited to principal.
- An extra payment works best if you have an emergency fund in place, because the money you send to your mortgage is no longer available if you face an unexpected expense.
- Making extra payments is optional and does not change your required monthly payment—you still owe the same amount each month unless you refinance.
How to Send an Extra Payment Without Mistakes
Contact your lender and ask how they accept extra principal payments. Most lenders allow you to send a check, make an online payment, or set up automatic transfers. The key step is to specify in writing or in the payment memo that the extra money should go to principal, not to next month's payment or an escrow account. Some lenders automatically apply extra money to your next scheduled payment instead of principal, which defeats the purpose.
If you pay by check, write "principal only" on the memo line and include a note with your loan number stating that the payment should reduce principal. If you pay online, look for a field that lets you choose where the money goes—usually labeled "principal," "extra payment," or "pay down balance." Call your lender's payment department to confirm the payment was applied correctly on your next statement. A single misdirected payment can cost you months of interest savings.
Three Ways to Structure the Extra Payment
The most common approach is to send one full extra payment once per year, usually in a month when you have a bonus, tax refund, or extra income. This is simple to track and requires no change to your monthly budget. The downside is that the money sits in your account for months before you send it, and you might be tempted to spend it.
A second method is to divide the extra payment into twelve smaller amounts and add it to your regular payment each month. If your payment is $1,500 and one extra payment is $1,500, you would pay $1,625 per month ($1,500 + $125). This spreads the benefit across the year and removes the temptation to spend the lump sum. The drawback is that it tightens your monthly budget permanently.
A third option is biweekly payments: instead of paying once per month, you pay half your monthly payment every two weeks. Over a year, this results in one extra full payment (26 half-payments = 13 full payments instead of 12). Some lenders offer biweekly programs, though a few charge a fee to set them up. You can also do this yourself by sending half-payments on your own schedule without enrolling in a formal program.
Check for Prepayment Penalties Before You Start
A prepayment penalty is a fee your lender charges if you pay off part or all of your loan early. Most mortgages sold today do not have prepayment penalties, but some do—particularly loans issued during the 2000s housing boom or loans sold to investors rather than held by the original lender. If your loan has a prepayment penalty, making extra payments may cost you more than you save in interest.
Look at your Closing Disclosure or Loan Estimate document; both list prepayment penalties if they exist. If you cannot find the document, call your lender and ask directly: "Does my loan have a prepayment penalty, and if so, how much is it and when does it expire?" Write down the answer and the name of the person who told you. If a penalty exists and expires in a few years, you might wait until it expires to start making extra payments.
The Real Cost of Keeping Money in Your Mortgage
Once you send money to your lender, you cannot get it back without refinancing or taking out a home equity loan. If you face a job loss, medical emergency, or major home repair, that money is locked away. This is why financial advisors recommend building a emergency fund of three to six months of expenses before making extra mortgage payments. If you do not have this cushion, the risk of needing that money outweighs the interest savings.
Compare the interest rate on your mortgage to what you could earn in a high-yield savings account. If your mortgage is 6% and a savings account pays 4%, you save 2% by paying down the mortgage. But if you need the money and have to borrow it back at credit card rates (15% to 25%), you lose that advantage instantly. The extra payment only makes financial sense if you are certain you will not need the money for the life of the loan.
How Much Interest You Actually Save
The amount you save depends on three things: your loan amount, your interest rate, and how many years you shorten the loan. A borrower with a $300,000 loan at 6% interest who makes one extra payment per year will pay off the loan in roughly 24 to 26 years instead of 30, saving approximately $60,000 to $80,000 in interest. A borrower with a $150,000 loan at the same rate saves roughly $30,000 to $40,000. A borrower at 4% interest saves less in dollar terms because the interest rate is lower to begin with.
Your lender can run an amortization schedule showing exactly how much interest you pay with and without extra payments. Ask them to show you the payoff date and total interest for both scenarios. This number is useful for deciding whether the extra payment fits your budget and whether it makes sense compared to other uses for that money, such as investing or paying down higher-interest debt.
What Happens to Your Monthly Payment
Making extra payments does not lower your required monthly payment. You still owe the same amount each month unless you refinance the loan. The extra payment simply reduces the balance faster, which means you pay off the loan sooner and pay less interest overall. If you need to lower your monthly payment, you would have to refinance into a new loan with a longer term, which usually costs money in closing fees and may raise your interest rate.
Some borrowers confuse extra payments with loan modification, which is a formal change to the terms of your loan. Modification can lower your payment but requires lender approval and is usually only available if you are behind on payments or facing hardship. An extra payment is simply sending more money toward principal on your existing loan—it requires no approval and no paperwork beyond confirming with your lender that the payment goes to principal.
Frequently Asked Questions
Can I make extra payments if I have an FHA or VA loan?
Yes. FHA and VA loans do not prohibit extra payments. However, some lenders that service these loans charge fees or have specific procedures for applying extra payments to principal. Contact your servicer before sending money to confirm the process and ensure the payment is credited correctly.
What if I want to stop making extra payments?
You can stop at any time. Your required monthly payment does not change, and you have already benefited from the principal reduction. If you made extra payments for five years and then stopped, you would still pay off the loan faster than if you had never made them.
Does making one extra payment per year affect my credit score?
No. Extra payments reduce your balance and lower your credit utilization on your mortgage, which may slightly improve your score over time. They do not hurt your credit in any way.
Should I make extra payments or invest the money instead?
This depends on your interest rate and investment returns. If your mortgage is 6% and you can reliably earn 8% or more investing, investing may build more wealth. If your mortgage is 7% and you are uncertain about investment returns, paying down the mortgage is a may provide 7% return. Consider your risk tolerance, emergency fund status, and other debts before deciding.
Can I make extra payments on a second mortgage or home equity line of credit?
Yes, the same rules apply. Contact your lender to confirm the payment goes to principal and check for prepayment penalties. Second mortgages often have higher interest rates, so extra payments may save more money than on a primary mortgage.