Making One Extra Mortgage Payment Each Year
What happens when you pay an extra mortgage payment annually
One extra mortgage payment per year reduces the total interest you pay over the life of your loan and shortens how long you owe money on your home. Because mortgage interest compounds daily, paying principal faster means less interest accrues on the remaining balance. A single extra payment applied to principal can save tens of thousands of dollars depending on your loan amount, interest rate, and how many years remain.
The mechanics are straightforward: you make your regular monthly payment, then send an additional payment equal to one month's principal and interest (or just principal, depending on your lender's rules). That extra money goes directly to reducing what you owe, not toward next month's payment. Over 30 years, one extra payment per year can cut 4 to 5 years off your mortgage timeline.
The catch is that this only works if your lender accepts extra payments without penalty and applies them to principal rather than holding them in escrow or crediting them to future payments. Before you start, confirm your loan documents allow prepayment without a fee—most modern mortgages do, but some older loans or certain loan types carry prepayment penalties.
Key Takeaways
- One extra payment per year reduces total interest paid and shortens your loan by roughly 4 to 5 years on a 30-year mortgage.
- The extra payment must be applied to principal, not held as a credit toward future payments or placed in escrow.
- Check your loan documents or call your lender to confirm there is no prepayment penalty before sending extra money.
- You can make the extra payment as a lump sum once yearly, or divide it into smaller monthly amounts—the result is nearly identical.
- This strategy works best if you have stable income and no high-interest debt competing for the same dollars.
How to send the extra payment to your lender
Contact your mortgage servicer (the company that processes your monthly payment) and ask how they accept extra principal payments. Most servicers allow you to pay online through their portal, by phone, or by mail. Some require you to write "apply to principal" or "extra principal payment" on the check or in a note field when paying online—this prevents the payment from being misapplied to next month's regular payment.
Ask your servicer whether they prefer one lump sum once per year or whether you can divide it into 12 smaller payments. Many servicers handle both methods equally, though some have a minimum payment amount for online transactions. If your servicer charges a fee for extra payments (rare but possible), factor that into your decision—a $25 fee on a $1,200 extra payment cuts your savings.
Keep records of every extra payment: the date sent, the amount, and confirmation that it was applied to principal. Your monthly statement should reflect the reduced principal balance. If an extra payment does not show up correctly within two billing cycles, contact your servicer immediately to correct it.
The math: how much you actually save
The savings depend on three things: your loan amount, your interest rate, and how many years remain on your mortgage. On a $300,000 loan at 6% interest with 30 years remaining, one extra $1,800 payment per year saves roughly $64,000 in total interest and eliminates about 5 years of payments. On the same loan at 4% interest, the savings drop to roughly $40,000 and 4 years. On a $500,000 loan at 6%, the savings climb to roughly $107,000.
The earlier in your mortgage you start, the larger your savings. An extra payment in year 1 saves more than an extra payment in year 25, because the money has more time to compound. If you are 10 years into a 30-year mortgage, one extra payment per year for the remaining 20 years still saves meaningful money—roughly 2 to 3 years of payments—but less than if you had started at the beginning.
Use an online mortgage calculator to model your specific situation. Enter your loan amount, rate, remaining term, and the extra annual payment amount. The calculator will show you the new payoff date and total interest saved. This helps you decide whether the extra payment fits your budget and whether the savings matter to your long-term plan.
Dividing one payment into 12 smaller amounts
Instead of sending one lump sum once per year, you can divide the extra payment into 12 equal monthly installments and send it with your regular payment each month. The math works out nearly identically—you pay the same total amount and reduce your loan by roughly the same number of years. The main difference is psychological: smaller monthly amounts feel less painful than one large check, and the discipline is easier to maintain.
If your regular payment is $1,800 and you want to make one extra payment per year, you would add $150 to each monthly payment ($1,800 ÷ 12 = $150). Over 12 months, that totals $1,800. Make sure your lender knows to apply all of it to principal, not to spread it across future payments. Some servicers automatically apply extra amounts to principal; others require you to specify it each time.
The downside of splitting the payment is that you lose track of it more easily. A single annual payment is harder to forget or skip. If you choose the monthly route, set up an automatic transfer from your bank account to your servicer so the extra amount goes out without you thinking about it.
When one extra payment per year makes sense
This strategy works best if you have stable income, your mortgage rate is higher than what you could earn in savings, and you have no high-interest debt (credit cards, personal loans) competing for the same money. If you are paying 6% on your mortgage but 18% on a credit card, paying down the credit card first saves you more money overall.
It also makes sense if you plan to stay in your home long enough to recoup the benefit. If you sell or refinance in 5 years, the extra payments reduce what you owe at sale or refinance, but you do not capture the full 4- to 5-year time savings. On a shorter timeline, the benefit shrinks but does not disappear—you still reduce your loan balance and total interest paid.
The strategy is less useful if you have an adjustable-rate mortgage that will reset to a higher rate soon, or if you are already stretching your budget to make your regular payment. In those cases, keeping cash in reserve for emergencies or rate increases is smarter than accelerating your payoff.
Alternatives if you cannot afford an extra payment
If your budget does not allow a full extra payment, even split into 12 pieces, you can still reduce interest by paying any amount toward principal whenever you can. An extra $100 per month ($1,200 per year) saves less than a full payment but still shortens your loan and cuts interest. The principle is the same: any extra principal payment reduces what you owe and what you pay in interest.
Another option is to make biweekly payments instead of monthly payments. If you are paid every two weeks, sending half your monthly mortgage payment every two weeks results in 26 half-payments per year—equivalent to 13 full monthly payments. This achieves roughly the same result as one extra payment per year without requiring a lump sum. Ask your servicer if they support biweekly payment plans; some charge a small setup fee, while others offer it free.
Refinancing to a shorter loan term (15 years instead of 30) also accelerates payoff, but it raises your monthly payment and locks you into a new rate. This makes sense only if rates have dropped significantly or your financial situation has improved enough to handle the higher payment. For most people, one extra payment per year is simpler and more flexible than refinancing.
Prepayment penalties and loan restrictions
Most mortgages issued in the last 15 years have no prepayment penalty, meaning you can pay extra principal at any time without cost. However, some loans—particularly those sold to investors or loans with special terms—do carry penalties if you pay off the loan early or pay down principal faster than scheduled. A prepayment penalty typically ranges from 1% to 5% of the loan amount and applies only if you pay off the entire loan within a set window (often 3 to 5 years).
Check your loan documents (the promissory note or deed of trust) for language about prepayment penalties. If you cannot find it, call your servicer and ask directly: "Does my loan have a prepayment penalty?" They must answer truthfully. If a penalty exists, calculate whether the interest you save by paying extra exceeds the penalty cost. On most loans, it does not—the penalty is designed to protect the lender's profit if you refinance or sell early.
Some government-backed loans (FHA, VA, USDA) prohibit prepayment penalties by law, so those borrowers can always pay extra without restriction. Conventional loans issued after 2014 also cannot carry prepayment penalties. If your loan is older or non-standard, verification is worth the phone call.
Frequently Asked Questions
Can I make one extra payment per year if I have an adjustable-rate mortgage?
Yes, but the benefit changes when your rate adjusts. Extra payments reduce your principal balance, which lowers the amount your new rate applies to. However, if rates rise significantly, your monthly payment may increase anyway. Focus on paying extra while rates are favorable, and reassess when your rate resets.
What if I want to stop making extra payments partway through?
You can stop at any time. The extra payments you have already made reduce your loan balance permanently, so you keep that benefit. Your regular monthly payment stays the same unless you refinance or your loan terms change. There is no penalty for stopping.
Does making one extra payment per year hurt my credit score?
No. Paying more than required actually helps your credit by lowering your debt-to-income ratio and showing you manage debt responsibly. It does not hurt your score in any way.
Should I make the extra payment from my tax refund or bonus?
If you receive a lump sum (tax refund, work bonus, inheritance), sending it toward mortgage principal is a solid use of money—you reduce interest and shorten your loan. However, first make sure you have 3 to 6 months of emergency savings set aside. If you do not, putting the lump sum into savings first is smarter than paying down your mortgage.
How do I know if my extra payment was actually applied to principal?
Check your next mortgage statement. Your principal balance should decrease by the amount of your extra payment (minus any interest that accrued between payments). If it does not, contact your servicer immediately. Keep records of every extra payment you send so you can verify it was received and applied correctly.