How to Make an Extra Mortgage Payment and What It Actually Does
What an extra mortgage payment does
An extra mortgage payment reduces the principal balance of your loan, which means you pay less interest over time and finish paying off the house sooner. If you make one extra payment per year, you can shorten a 30-year mortgage by roughly 5 to 7 years, depending on your interest rate and how far into the loan you are. The earlier you make extra payments, the more interest you save.
The catch: your monthly payment stays the same unless you ask your lender to recalculate it. Making an extra payment does not lower your next month's bill. Instead, that money goes straight to principal, and you continue paying the regular amount until the loan ends earlier than scheduled.
Key Takeaways
- An extra payment reduces principal immediately, saving you thousands in interest and shortening your loan by years.
- You must instruct your lender to apply the payment to principal, not to next month's regular payment, or the money may sit in an escrow account.
- The best time to make extra payments is early in the loan, when most of your regular payment goes to interest rather than principal.
- You can make extra payments as a lump sum once a year, split into monthly additions, or whenever you have cash available.
- Before sending extra money, confirm your loan has no prepayment penalty and that your lender will not charge a fee for the transaction.
How to send the money to your lender
Call your mortgage servicer (the company that collects your payment each month) and ask how they accept extra principal payments. Most lenders now allow you to make payments online through their website or app, by phone, or by mail. Some charge a small fee for extra payments made by phone or mail, though online payments are usually free.
When you submit the payment, be explicit: write "apply to principal" or "extra principal payment" in the memo line or payment notes. Do not just send extra money without instruction—some servicers will hold it in a suspense account or apply it to your next regular payment instead of reducing principal. If you are mailing a check, include a letter stating the loan number, the amount, and that it should be applied to principal only.
Ask your servicer in writing (email or letter) to confirm they received the payment and applied it correctly. Request an updated loan statement showing the new principal balance. This creates a record and catches any mistakes before they compound.
Timing: when in the year or loan cycle to pay extra
The sooner you make an extra payment, the more interest it saves. A $10,000 extra payment made in year 1 of a 30-year loan saves far more interest than the same payment made in year 20. This is because early in the loan, most of your regular payment goes to interest; later, most goes to principal. An extra payment early redirects money that would have gone to interest for decades.
You can make extra payments whenever you have the cash—after a bonus, a tax refund, or an inheritance. You do not have to wait for a specific month. Some people make one lump-sum payment per year; others add $100 or $200 to their regular payment each month. The method does not matter; what matters is that the money goes to principal as early as possible.
If you receive a large sum and are deciding between paying down the mortgage or investing it, consider your mortgage interest rate. If your rate is 3 percent and you could earn 5 percent in a savings account or investment, the math slightly favors investing. But if your rate is 6 or 7 percent, paying down the mortgage is usually the safer, may provide return.
Prepayment penalties and fees to watch for
Before making an extra payment, check your loan documents or call your servicer to confirm there is no prepayment penalty. This is a fee some lenders charge if you pay off the loan early or pay down principal faster than scheduled. Prepayment penalties are less common now than they were 15 years ago, but they still exist on some loans, particularly those sold to investors or those issued during the 2000s housing boom.
Your loan documents will state the penalty clearly—usually a percentage of the amount paid early or a number of months' interest. If a penalty exists and you want to make extra payments anyway, calculate whether the interest you save exceeds the penalty. Often it does, but not always.
Also ask whether your servicer charges a fee for processing extra principal payments. Some charge $15 to $25 per transaction if you pay by phone or mail; online payments are usually free. If fees apply, making one large annual payment costs less than making 12 small monthly additions.
How extra payments change your escrow account
If your mortgage payment includes escrow—money set aside for property taxes and homeowners insurance—an extra principal payment does not affect that account. Your escrow amount is calculated separately based on your tax bill and insurance premium, and it adjusts once a year. Making extra principal payments does not lower your escrow contribution.
However, when you pay off the mortgage early, your escrow account closes. Your lender will send you any remaining balance, usually within 30 to 45 days after the loan is paid in full. If you overpaid into escrow during the final months, you will receive that refund. If escrow was short, you may owe a small amount.
Alternatives to extra payments if cash is tight
If you cannot afford a full extra payment but want to reduce interest, you can add a small amount to your regular payment each month. Adding $50 or $100 per month still reduces principal and interest over time, though the effect is smaller than a lump-sum payment. This method also works if you receive irregular income and cannot predict when you will have a large sum available.
Another option is to refinance to a shorter loan term—say, from 30 years to 15 years. This locks in a higher monthly payment but guarantees you will pay off the house faster. Refinancing makes sense if interest rates have dropped since you took out your original loan, because the new rate may be low enough that the higher payment is manageable.
If your goal is simply to build equity faster without changing your payment, extra principal payments are the most flexible option. You control the amount and timing, and you can stop at any time if your financial situation changes.
What happens to your credit score and taxes
Making extra mortgage payments does not hurt your credit score. In fact, paying down debt faster can improve your score over time by lowering your overall debt-to-income ratio. However, the effect is usually small because mortgage debt is viewed as "good debt" by credit scoring models.
Extra mortgage payments do not create a tax deduction. You can only deduct mortgage interest you actually paid during the year, and paying principal early does not generate additional interest to deduct. If anything, paying off the loan faster means you will deduct less interest in future years. This is a minor consideration for most people, but it matters if you rely on the mortgage interest deduction to lower your taxes.
Frequently Asked Questions
Can I make an extra payment if I am behind on my mortgage?
No. If you are behind, your lender will apply any payment you send to the overdue amount first, not to principal. Contact your servicer immediately to discuss a payment plan or loan modification. Making extra payments when you are behind will not help and may delay the resolution of your delinquency.
What if my lender loses or misapplies my extra payment?
This is rare but happens. Always pay online or by check with a memo line stating "principal only," and request written confirmation from your servicer. If a payment is misapplied, contact your servicer in writing and provide proof of payment. Ask for a corrected statement. If the servicer does not fix it within 30 days, file a complaint with the Consumer Financial Protection Bureau.
Does making an extra payment affect my ability to refinance later?
No. A lower principal balance actually makes refinancing easier because you owe less. Your loan-to-value ratio improves, which can lower your refinance rate. The only exception is if you are refinancing very soon and the lender uses an outdated appraisal; in that case, a lower balance does not help if the home value has not increased.
Can I make extra payments on a variable-rate mortgage?
Yes. Extra principal payments work the same way on adjustable-rate mortgages as on fixed-rate loans. The payment reduces principal immediately, saving interest regardless of whether your rate is fixed or variable. If your rate is about to adjust upward, making extra payments beforehand can lower the principal balance and reduce the impact of the higher rate.
What if I want to stop making extra payments later?
You can stop at any time. Extra payments are voluntary, and your lender cannot require you to continue them. Your regular monthly payment stays the same whether you make extra payments or not. If you need cash in the future, simply resume paying only the regular amount.