Mortgage extra payments — the math
On this page
Every dollar of extra mortgage principal saves you the future interest that dollar would have accrued over the remaining loan. That sentence is correct but doesn’t help. Here’s the version that helps: early extra payments save 5–10× as much as late extra payments, and most homeowners aim them in the wrong place.
This is the working-engineer guide to the math.
How a mortgage payment is split
Each month, your payment is divided into two parts: interest and principal.
- Interest = the lender charges you for borrowing the money you
still owe. Computed monthly:
balance × (APR ÷ 12). - Principal = the part that actually pays down the balance. Whatever’s left after interest.
A new $400,000 mortgage at 7% APR has a fixed monthly payment of about $2,661. Month 1:
- Interest: $400,000 × (0.07 ÷ 12) ≈ $2,333
- Principal: $2,661 − $2,333 ≈ $328
That’s the answer to “where did my first payment go?” — 88% of it was interest. Only 12% bought down the loan.
Month 60 (year 5):
- Balance: ~$378,000
- Interest: ~$2,205
- Principal: ~$456
Month 240 (year 20):
- Balance: ~$245,000
- Interest: ~$1,431
- Principal: ~$1,230
Month 360 (final):
- Balance: ~$2,646
- Interest: ~$15
- Principal: ~$2,646
The principal portion grows over the life of the loan; the interest portion shrinks. This is the amortisation curve, and it’s the single most important shape to internalize about mortgages.
Why early extra payments save so much more
Throw an extra $1,000 at your $400K mortgage in month 1:
- It immediately reduces your balance to $399,000.
- All future interest is computed on the lower balance.
- Over 30 years, that $1,000 saves about $4,500 of future interest at 7% — and shaves a few months off the loan because the amortisation table compresses.
Throw an extra $1,000 at the same mortgage in month 300 (year 25, 5 years to go):
- Balance was about $134,000.
- The $1,000 reduces it to $133,000.
- Over the remaining 5 years, that $1,000 saves about $200 in interest.
Same $1,000. 22× the savings if you put it in early.
The reason is compounding. The $1,000 you save in month 1 doesn’t just save its own interest — it stops the interest on that interest from accruing for 30 years. By month 300, there’s only 5 years left for compounding to do its work.
This is the answer to “should I prepay the mortgage or invest?” If you’re early in the loan and your APR is comparable to or higher than your expected investment return, prepaying wins on a risk-adjusted basis. Late in the loan, the math reverses — there’s not enough remaining time for prepayment savings to compound.
The four ways to throw extra money at a mortgage
Each has a different effect. Understanding which is which matters.
1. Extra principal each month
Add $200 to every monthly payment with “apply to principal” in the memo. (Many lenders default to applying extras to next month’s payment unless you specify principal — read the small print.)
This is the canonical “pay off your mortgage faster” move. On a $400K, 30-year, 7% mortgage with $200 extra each month:
- Loan paid off in: 24 years 4 months (vs 30)
- Total interest saved: ~$108,000
5.7 years and a hundred grand for $200/month. Compounding does the work; you just need to start early.
2. One-time lump sums
Tax refund, year-end bonus, inheritance — apply it to principal once. Same compounding logic; the saved interest is multiplied by the remaining loan years.
A single $10,000 lump sum applied in year 1 of the example mortgage saves about $34,000 in future interest and shaves about 2 years off the loan. Same $10,000 applied in year 20 saves about $3,500 and shaves about 6 months.
The “what to do with a windfall” decision is mostly the same as the “monthly extras” decision: how early in the mortgage are we?
3. Biweekly payments
Instead of paying once a month, pay half the monthly amount every two weeks. Result: 26 half-payments per year = 13 full payments instead of 12. The “extra” 13th payment goes to principal.
On the example mortgage, biweekly payments save about $76,000 in interest and shave 4 years off the loan. Less aggressive than $200/month but doesn’t require new cash flow — same money, different schedule.
Caution: many lenders don’t offer true biweekly schedules. Third-party “biweekly programs” sometimes charge fees. The self-managed version is to set up an autopay for half the payment every two weeks, manually marked as principal-bearing, after confirming with your lender that they’ll apply it correctly.
4. Round up
Pay $2,700 instead of $2,661 — round up to the nearest $100. Or $2,750. The “extra $39” is a tiny amount; the impact compounds similarly to method 1 but at a smaller scale.
Worth noting: rounding up by even a small amount on a 30-year loan saves real money over the life of the loan, but it’s the smallest of the four methods. Best for people who want the discipline without the cash-flow change.
What “save $X” actually means
Two warnings about the savings numbers.
Future interest is in nominal dollars. Saving $100,000 over 30 years means $100,000 in mixed dollars across 2026 to 2056. In present-value terms — discounted at, say, 3% inflation — that’s about $50,000 of today’s purchasing power. Still a lot, but worth knowing.
Mortgage interest may be tax-deductible. In the US, the mortgage-interest deduction means each $1 of interest paid costs your real wallet ~$0.78 (at the 22% bracket). So saving $100K of mortgage interest is really saving ~$78K of after-tax money.
In Canada, the mortgage-interest on your principal residence is not deductible, so the “save $X” number is the full pre-tax amount — which is unusually high-impact among savings strategies.
In both countries, the after-investment-return comparison is what you should run for a careful “prepay vs invest” analysis. The mortgage calculator lets you see the prepayment savings; combine those with your expected investment-return to make the call.
When not to prepay
Three cases where extra principal isn’t the best use of the money:
- You have higher-APR debt. Credit cards at 24% beat any mortgage prepayment math. Pay those first.
- You don’t have an emergency fund. Liquid savings ($1K–$5K minimum, ideally 3 months of expenses) come before prepayment. Mortgage equity isn’t liquid — you can’t pay your car repair with home equity without taking on a HELOC at higher interest.
- Your mortgage rate is below the safe-investment rate. A 3% mortgage and a 5% Treasury bond mean you should buy the bond. The prepayment “saves” 3%; the bond “earns” 5%. Net: +2%.
The 2020–2021 cohort of US homebuyers locked in 2.5–3% rates that are below current safe-bond yields. For them, prepaying isn’t mathematically optimal — the same dollar earns more in a money market fund than it saves on the mortgage.
When prepayment definitely beats investing
The opposite case: a 7%+ mortgage and an uncertain investment horizon. Every $1 of prepayment is a guaranteed 7% return for the remaining life of the loan. The S&P 500’s expected return is 7–10% on average over decades, with massive year-to-year variance. For risk-averse savers, the certainty of the prepayment return often beats the higher-but-uncertain investment return.
The 2025 cohort of new homebuyers locking in 7% mortgages is in exactly this situation. Prepayment is unusually attractive right now.
The rule of thumb
If your mortgage APR > your expected long-term investment return (after taxes), prepay. If APR < expected return, invest.
For most people in 2026 with mortgages from the last 3 years and diversified index funds, those numbers are close enough that either is fine. The decision is usually more emotional than mathematical: do you sleep better with less mortgage debt or with more invested assets?
That’s a real question, not a math question.
Try it
The mortgage calculator at finance.tooljo.com supports extra-principal payments and shows you the savings + payoff date in real time. The debt calculator does the same for non-mortgage debt — and the math is identical, just with consumer APRs (much higher) and shorter loan lives (much shorter).
Both tools live in your browser. Nothing you enter is uploaded.