Do extra mortgage payments really pay off?

The right way to think about prepayment

Prepaying $1,000 of mortgage principal saves you years of compounded interest on that $1,000 at your loan’s rate. On a 6.5% 30-year loan in year 1, $1,000 of principal eliminated saves you about $1,400 of interest over the remaining schedule.

That’s a guaranteed, risk-free return at your loan rate. The right comparison is after-tax mortgage rate vs. after-tax return on alternative uses of the same dollar.

Three common strategies

1. Bi-weekly payments: Pay half your monthly payment every two weeks. 26 half-payments = 13 full payments per year — one extra full payment per year. On a 30-year mortgage this typically shortens the loan by ~5 years.
2. Extra monthly principal: Send a fixed extra amount with each payment. Easier to budget than bi-weekly, often easier to set up with the lender.
3. Lump-sum prepayment: Apply a windfall (bonus, tax refund, inheritance) to principal in a single shot. The earlier in the loan you do it, the more interest you save.

The right comparison metric

All three save interest — but they cost different amounts of total cash. Comparing them on “years saved” alone is misleading. Use dollars saved per dollar of extra cash sent:

efficiency = total_interest_saved / total_extra_cash_paid

A high efficiency means each extra dollar bought you a lot of interest savings. Our prepayment comparator computes this for all three strategies in one chart.

When NOT to prepay

• You don’t have an employer 401(k) match maxed out (free money).
• You have higher-rate debt (credit cards, personal loans).
• You don’t have 3–6 months of emergency cash.
• Your mortgage rate is below your reasonable expected after-tax investment return.