How Making One Extra Mortgage Payment a Year Saves You Thousands in Interest
Mortgage interest is front-loaded. In the early years of a 30-year loan, the vast majority of each monthly payment goes to interest rather than principal. This means that extra payments made early in the loan have a disproportionately large effect on the total interest you pay over the life of the loan.
Making one extra payment per year is the most commonly recommended strategy for accelerating mortgage payoff. Here is why it works and what the numbers look like.
The Math Behind One Extra Annual Payment
On a $300,000 loan at 6.5% interest over 30 years:
- Standard monthly payment: approximately $1,896
- Total interest over full term: approximately $382,000
- Total paid over 30 years: approximately $682,000
With one extra full payment per year applied directly to principal:
- Time to payoff: reduced by roughly 5 years (to approximately 25 years)
- Total interest saved: approximately $65,000
One payment per year. $65,000 saved. That is the power of targeting principal directly at the point in the loan where interest dominates.
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How to Structure the Extra Payment
Annual lump sum: Save up one month's worth of payment throughout the year and make it as a 13th payment in December or whenever cash flow allows. Specify to your lender that it should be applied to principal only and not to future scheduled payments.
Biweekly payment method: Pay half your monthly payment every two weeks instead of once per month. Since there are 52 weeks in a year, this results in 26 half-payments, which equals 13 full payments, the same outcome as one extra annual payment, distributed automatically throughout the year.
Monthly add-on: Add a fixed amount to your principal with every regular payment. Dividing one monthly payment by 12 and adding that amount each month achieves the same result more smoothly.
Critical: Specify "Applied to Principal"
This instruction matters. If you send an extra payment without specifying, many lenders will apply it as a future scheduled payment, meaning you pay next month's bill early but the amortization schedule does not change. The interest savings only materialize when the payment directly reduces your outstanding loan balance.
When Extra Payments Are Not the Best Use of Money
If your mortgage interest rate is low, say, below 4%, and you have access to investment accounts earning a higher average return, the mathematical case for extra mortgage payments weakens. Money earning 7% in an index fund grows faster than a 3.5% mortgage costs you in interest.
This calculation changes when interest rates are high or when the value of being debt-free has personal weight beyond the numbers. Both approaches are valid. The key is making the comparison explicitly rather than defaulting to one without considering the other.