Paying off your mortgage early saves interest and frees up cash flow, but it is not always the best use of money. Understanding how extra payments affect your loan helps you decide whether to prepay, invest, or do both.
Every extra dollar toward principal reduces the balance on which future interest is calculated. On a 30-year loan, even modest extra payments can shave years off the term and save tens of thousands in interest.
Extra principal payments
The simplest strategy is adding a fixed amount to each monthly payment. An extra $200 per month on a $350,000 loan at 6.5% for 30 years can cut roughly 6 years off the term and save over $90,000 in interest.
Lump-sum payments, from a bonus, tax refund, or inheritance, have an immediate impact. A $10,000 principal payment in year five reduces interest on every subsequent payment.
Specify that extra payments go to principal. Some lenders apply overpayments to future escrow or next month's payment unless you instruct otherwise.
Biweekly payment plans
Biweekly plans split your monthly payment in half and pay every two weeks. Because there are 26 biweekly periods per year, you end up making the equivalent of 13 monthly payments annually, one extra payment per year.
That extra payment accelerates payoff similarly to adding about 8% more to each monthly payment. Many lenders offer biweekly programs; you can also DIY by adding 1/12 of your payment each month.
Third-party biweekly services charge fees for something you can replicate free. Set up automatic extra principal payments instead unless your lender offers a free program.
Pay off early vs. invest
The math comparison is straightforward: if your mortgage rate is 6.5% and you expect investments to return 8% after tax, investing wins on average. If your rate is 7% and you are risk-averse, prepaying offers a guaranteed return equal to the interest rate.
Psychological factors matter. A paid-off home provides peace of mind and lower fixed costs in retirement. For some people, that is worth more than the spreadsheet-optimal choice.
Do not prepay aggressively while carrying high-interest credit card debt or skipping employer 401(k) match contributions. Pay off expensive debt and capture free money first.
Recasting as an alternative
A mortgage recast lets you make a lump-sum principal payment and re-amortize the loan at the same rate, lowering the required monthly payment without refinancing. It does not shorten the term unless you keep paying the old amount.
Recasting costs less than refinancing, typically a few hundred dollars, and makes sense when you want lower payments but your rate is already competitive.
Model your payoff plan
Enter your loan balance, rate, term, and extra payment amount to see the new payoff date and total interest saved.
Use the mortgage payoff calculator for extra payment scenarios, and the recast calculator if you are considering a lump-sum paydown with lower monthly payments.