Why Extra Payments Work So Hard
Every dollar paid above the minimum goes entirely to principal. It removes that dollar from the balance for the rest of the loan, so it saves every future interest charge that dollar would have generated. On a 6.71% mortgage, an extra payment earns a guaranteed, tax-free 6.71% — a return no savings account offers.
The effect is front-loaded. An extra $300 in year one of a 30-year loan removes far more interest than the same $300 in year twenty-five, because it has more years left to compound against.
Mortgage Payoff Chart
$285,000 remaining at 6.71% with 26 years to run:
| Extra each month | Payoff time | Interest paid | Interest saved |
|---|---|---|---|
| $0 | 26.0 years | $318,094 | — |
| $100 | 22.9 years | $273,528 | $44,566 |
| $200 | 20.6 years | $240,928 | $77,165 |
| $300 | 18.8 years | $215,822 | $102,272 |
| $500 | 15.9 years | $179,351 | $138,743 |
| $1,000 | 11.8 years | $127,290 | $190,804 |
Note the diminishing returns: the first $100 saves $44,566, while the jump from $500 to $1,000 saves only another $52,061 for five times the outlay.
The Biweekly Trick
Paying half the monthly amount every two weeks produces 26 half-payments a year — the equivalent of 13 monthly payments instead of 12. That single extra payment typically removes four to five years from a 30-year mortgage.
There is nothing magical in the fortnightly schedule itself. Dividing the monthly payment by twelve and adding it each month achieves the identical result, without the setup fee that some servicers charge for biweekly plans.
When Not to Prepay
- Before an emergency fund exists. Money in the house is not accessible without a refinance or a HELOC, and a job loss does not care about your equity.
- While higher-rate debt exists. Credit cards at 22% and car loans at 9% come first, always.
- Before capturing the full employer match. A 50% match beats a 6.71% guaranteed return by a wide margin.
- On a very low fixed rate. With a 3% mortgage, ordinary savings accounts have recently paid more — prepaying is a guaranteed loss against the alternative.
Getting the Mechanics Right
Mark extra payments as "apply to principal" explicitly. Servicers frequently default to holding the money for the next scheduled payment, which reduces nothing. Verify on the next statement that the balance fell by the full amount. Also confirm there is no prepayment penalty — rare on modern conforming loans, but not extinct.
Frequently Asked Questions
Does paying extra lower my monthly payment?
No. It shortens the loan instead. The payment stays the same unless you request a recast, which some lenders offer for a small fee after a large lump sum.
Is it better to prepay or invest?
Compare the mortgage rate against your expected after-tax investment return. At 6.71% the comparison is close to even against equities and clearly favourable against bonds — and prepaying carries no risk.
What is mortgage recasting?
Paying a lump sum and having the lender recalculate the payment over the original term. It lowers the payment without refinancing and typically costs $150–$500, though not all loans are eligible.