One of the most powerful ways to save money on a mortgage is by making extra payments. Even small additional contributions toward the principal can shorten your loan term by years and save you tens of thousands of dollars in interest. In this guide, you’ll learn how to calculate the impact of extra payments and how to set up a strategy that works for your financial goals. To explore more ways to calculate and compare mortgages, visit our “full guide to calculating a mortgage loan”
1. Understanding Extra Payments
When you make an extra payment, it goes directly toward the principal balance of your loan. Since interest is calculated on the remaining balance, paying down the principal faster reduces the total interest you’ll pay.
There are three common approaches:
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Monthly Extra Payments – Add a fixed amount to each monthly payment.
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Annual Lump Sum – Make one larger extra payment each year.
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Occasional Extra Payments – Apply bonuses, tax refunds, or windfalls to your mortgage.
2. How to Calculate Extra Payments
Let’s look at an example.
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Loan Amount: $250,000
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Interest Rate: 6% (0.005 monthly)
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Term: 30 years (360 payments)
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Standard Payment: ≈ $1,498.88
Adding $200 Extra Each Month
New monthly payment = $1,698.88
Instead of 360 payments, your loan could be paid off in about 24 years.
Interest savings: More than $70,000 compared to the standard schedule.
3. Using an Amortization Schedule with Extra Payments
To calculate precisely:
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Start with the standard payment formula.
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Each month, calculate interest = Balance × Monthly Rate.
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Subtract interest from the total payment → Principal portion.
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Subtract principal from balance → New balance.
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Add extra payment directly to principal each month.
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Repeat until the balance reaches zero.
Example Snapshot
| Payment # | Standard Payment | Extra Payment | Principal Paid | Interest Paid | Balance Remaining |
|---|---|---|---|---|---|
| 1 | $1,498.88 | $200.00 | $448.88 | $1,050.00 | $249,551.12 |
| 2 | $1,498.88 | $200.00 | $450.12 | $1,048.76 | $249,101.00 |
4. Strategies for Extra Payments
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Round Up Your Payment – Even rounding from $1,498 to $1,600 makes a difference.
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Switch to Bi-Weekly Payments – Paying half every two weeks results in 26 payments per year (13 months instead of 12).
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Target a Payoff Date – For example, plan to pay off your mortgage before retirement by scheduling fixed extra payments.
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Apply Windfalls – Tax refunds, bonuses, or side income can accelerate your payoff.
5. Things to Check Before Making Extra Payments
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Prepayment Penalties – Some loans charge fees for paying off early.
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Loan Type – Fixed-rate loans benefit more than adjustable-rate loans.
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Emergency Fund – Don’t overextend; make sure you keep savings aside.
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Other Debts – Sometimes paying off high-interest debt first is smarter.
Conclusion
Making extra payments on your mortgage is one of the simplest and most effective financial strategies for long-term savings. Whether it’s a few hundred dollars each month or an occasional lump sum, these payments go straight toward reducing your principal and cutting down interest.