What an extra payment actually buys
Every dollar you send above the scheduled payment goes straight to principal. Because interest is charged on the balance, reducing the balance today removes interest from every remaining month of the loan. On a 30-year mortgage in the mid-6 per cent range, an extra $300 a month typically cuts something like six to eight years off the term and removes six figures of interest.
Timing matters more than most people expect. The same $10,000 applied in year two removes far more interest than in year twenty, because it has more remaining months to work across. If you are choosing when to make a lump-sum payment, earlier is almost always stronger.
Three ways to do it
- Extra monthly — the most predictable. Set it up as an automatic additional principal payment so it happens without a decision each month.
- Lump sum — a bonus, a tax refund, proceeds from a sale. Best applied early.
- Biweekly — half a payment every two weeks. Because there are 26 fortnights in a year, you make the equivalent of 13 monthly payments instead of 12.
A caution on biweekly: third-party services charge a fee to set this up, and they do exactly what you can do for free by dividing one payment by twelve and adding it to each month. Check whether your servicer applies biweekly payments immediately or holds them until a full payment accumulates, because the latter removes most of the benefit.
Prepaying versus recasting
These are genuinely different tools and the better one depends on what you need.
Prepaying keeps your payment the same and shortens the loan. You save the most interest. But the money is gone into the house, your required payment has not changed, and if your income drops you get no relief.
Recasting applies a lump sum and then re-amortises the remaining balance over the original remaining term. The payoff date stays put, the monthly payment falls permanently, and you save less interest than prepaying. Servicers typically charge $150 to $500 and require a minimum lump sum, often $5,000 or $10,000. Not every loan is eligible — FHA, VA and USDA loans generally are not.
The panel above runs both against your actual numbers. Broadly: prepay if your priority is getting out of the loan, recast if your priority is monthly breathing room.
When not to prepay
Extra principal is a guaranteed, tax-free return equal to your mortgage rate. That is genuinely attractive at 7 per cent and much less compelling at 3 per cent. Before accelerating, it is usually worth clearing higher-rate debt, capturing any employer retirement match, and holding a real emergency fund — because unlike a savings account, money paid into a mortgage is not easily retrievable when you need it.
Common questions
Does paying extra lower my monthly payment?
No. Extra principal shortens the loan but leaves the required payment unchanged. If you want a lower monthly payment, you need a recast or a refinance. This is the single most common misunderstanding about prepaying, and the comparison panel above shows both outcomes side by side.
How do I make sure the extra goes to principal?
Most servicers apply overpayments to the next month's payment by default rather than to principal. Look for a dedicated 'additional principal' field in your online portal, or note it explicitly on the payment. Then check the next statement to confirm the balance dropped by the full amount.
Is there a penalty for paying off early?
Prepayment penalties are prohibited on qualified mortgages in the United States and are rare on residential loans generally. They do still appear on some non-qualified, investor and DSCR loans, often as a step-down over the first three to five years. Check your note before making a large payment.
Is biweekly better than adding extra monthly?
They are nearly identical in effect. Biweekly's advantage is behavioural — it happens automatically and aligns with fortnightly pay. Its disadvantage is that some servicers hold the half payments rather than applying them immediately, and third-party enrolment services charge for something you can do yourself.
Should I recast or refinance?
Recasting keeps your existing rate and costs a few hundred dollars. Refinancing replaces the loan entirely, costs thousands, and only makes sense if the new rate is meaningfully lower. If you like your rate and simply want a lower payment after a windfall, recasting is usually the cheaper answer.