Making just two extra mortgage payments a year can save you a surprising amount of money over the lifetime of your loan. You can make equivalent amounts in smaller payments each month, add an extra amount to your regular mortgage, or pay a lump sum once a year.
When you make additional payments toward your principal, you can pay off your mortgage faster, which means less interest accrues over time. On a typical 30-year mortgage, this can save you tens of thousands or even hundreds of thousands in interest.
For example, on a $431,000 home with 20% down and a 6.71% interest rate, making the equivalent of two extra monthly payments each year, can save you $170,480 in interest and help you pay off your home about 9 years and 10 months early.
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What happens if you make two extra mortgage payments a year?
Making two extra mortgage payments annually can significantly reduce the interest you pay over time and help you pay off the loan faster.
Let’s say you buy a $431,000 home and make a 20% down payment. Your mortgage amount is $344,800, financed over 30 years at a 6.71% fixed interest rate. Your regular monthly payment (principal + interest) would be $2,227.
If you make only the scheduled payments, you’ll spend $456,994 in interest over 30 years.
Two extra mortgage payments a year could be equivalent to:
- $371.20 extra each month for a total monthly payment of $2,598
- $4,454 once a year in addition to your regular mortgage payments
| Total interest paid | Payoff time | Interest savings | |
|---|---|---|---|
| No extra payments | $456,994 | 30 years | 0 |
| $371 extra a month or $4,454 a year | $286,514.63 | 20 years, two months | $170,480 |
Make sure the lender marks the extra payments to apply to the principal balance of your loan so they don’t get credited as future scheduled payments.
Does it matter when I make the extra payment?
If you make your extra payments earlier in the year, it will reduce your principal balance (and the interest you are paying) more quickly. That said, if you want to spread those payments throughout the year, you’ll still save significantly on interest for your loan.
How much do two extra mortgage payments a year save?
Using the same example above, adding two extra monthly payments a year would cut your payoff time by more than nine years, saving you $170,480 in interest. You’d be mortgage-free in just under 21 years.
For a $344,800 loan amount at a 6.71% fixed interest rate and 30-year term, even smaller extra amounts applied toward the principal can make a big difference.
| Extra monthly payment | Years to pay off | Interest saved over the life of the loan |
|---|---|---|
| $0 | 30 years | $0 |
| $10 | 29 years, 8 months | $7,574 |
| $25 | 29 years, 2 months | $17,941 |
| $100 | 26 years, 8 months | $64,352 |
| $371 | 20 years, 2 months | $170,480 |
| $500 | 8 years, 8 months | $203,775 |
| Note: These numbers are estimates. How much you’ll save will depend on the home you want, the current interest rates, and the number of extra payments you make a year. | ||
Pros and cons of paying extra mortgage payments
Making extra mortgage payments comes with benefits and drawbacks. Weighing the pros and cons can help you make an informed decision.
✅ Pros
- Significant interest savings
- Pay off your mortgage sooner
- Build equity in your home faster
- Get rid of private mortgage insurance (PMI) faster
❌ Cons
- Ties up money in a home where it’s not easy to access
- Potential prepayment penalties
- Could strain your budget
- Smaller mortgage interest deduction
Why extra payments aren’t always the best choice
While paying off your mortgage early can save thousands in interest, it’s not always the smartest financial move.
One major drawback is the opportunity cost. The extra mortgage payment you make is money you can’t invest elsewhere.
If you locked in at a lower mortgage rate than what’s offered now, you may be better off investing in assets with higher potential returns.
For example, the S&P 500 has delivered an average annual return of 8% over the past century. Other smart uses of surplus income include investing in index funds, high-yield savings accounts, or bonds.
Extra payments can also strain your budget. The few hundred dollars you make each month may require cutting back on other expenses, which could affect your lifestyle. Plus, you’ll be tying up money in a home, which you can’t easily access in case of an emergency. If you don't have enough funds set aside for unexpected expenses, you should first focus on bolstering your emergency fund.
A safer approach is to set aside the extra cash in a dedicated savings account and make one lump-sum principal payment annually, keeping the cash available if needed.
Is it better to overpay monthly or annually?
There’s no one-size-fits-all answer. The best approach depends on your budget and how disciplined you are with extra funds.
If you have predictable income and can spare a few tens or hundreds of dollars each month, making larger monthly payments is the best option. Even small amounts add up quickly. It also:
- Will have less impact on your budget
- Works well for people who like consistency
- Helps reduce your balance earlier in the year, which means you save on interest sooner
If your income is irregular or you prefer to keep your money liquid for most of the year, annual payments might work better. Here’s why you want to consider this option:
- You can hold on to your funds, which can be useful for emergencies or unexpected expenses.
- It’s easier to track your progress.
- This strategy can be ideal if you receive a year-end bonus, profit share, or other seasonal income.
💡 Pro tip
If you want to be consistent with the extra mortgage payments, automate your finances or set up biweekly payments.
Alternatives to extra mortgage payments
Paying down your mortgage faster isn’t the only smart financial move you can make. Depending on your current financial situation and goals, these alternatives may provide better returns and flexibility.
Invest
If your mortgage rate is low, putting extra funds into investments like stocks, index funds, or a high-yield savings account may generate higher returns, which can outpace the savings from reducing mortgage interest.
Remember that investing comes with risks, and returns aren’t guaranteed. If you have a solid risk tolerance and a long-term horizon, this is probably a better option.
Home improvements
You can also use the surplus cash to make strategic home improvements that can increase your home’s value.
Kitchen remodels, bathroom upgrades, energy-efficient improvements, or curb appeal enhancements often yield some return on investment when you sell. However, not all improvements boost a property’s value, so be sure to do your research beforehand.
Shore up your emergency fund
Most finance experts recommend having at least three to six months’ worth of living expenses saved. This acts as a safety net in case of sudden job loss or unexpected expenses, ensuring that you don’t take on debt or tap into your home equity.
This option also offers peace of mind, making it a strong choice before committing to extra mortgage payments.
Pay down high-interest debt
If you carry credit card balances, personal loans, or other debts with interest higher than your mortgage, it often makes sense to pay off those first.
High-interest debt is often more expensive than the savings you’d get from the extra mortgage payments. Paying down reduces long-term interest costs and frees up cash for other things, including extra mortgage payments.
Should you make extra mortgage payments?
The decision whether to make two extra mortgage payments depends on your financial situation and goals.
You should make extra mortgage payments if:
- You have a solid emergency fund. This ensures that you don’t take another loan if an emergency arises.
- You want guaranteed interest savings. Unlike investing, which comes with risk, paying extra on your mortgage gives you a predictable and guaranteed return in the form of interest saved.
- Your mortgage rate is higher than what you’d earn from other investments. Paying down a mortgage with a 6.71% rate is better than what you’d get from savings accounts.
You should reconsider making extra mortgage payments if:
- Your mortgage rate is very low. In that case, your money could work harder for you elsewhere.
- You can earn more from other investments. Historically, stock market returns have been higher than mortgage interest rates, though they’re not guaranteed.
- You need to keep your cash accessible. Once you put money in your home, you can’t access it unless you borrow against it or sell the house.
FAQ
Yes, you can make extra mortgage payments at any time during your loan term, whether as a lump sum or smaller amounts spread throughout the year.
Not always. Unless you inform your lender that the extra payments are for reducing the principal, they’ll likely treat them as prepayment for future months.
To ensure your extra payment reduces your loan balance, include instructions (such as “apply to principal only”) when you submit the payment.
No, making two extra payments doesn’t change your regular monthly mortgage payments. You’ll still need to make the monthly payments until you fully pay off your mortgage.
The additional payments will help you pay off your mortgage sooner and reduce the interest you’ll pay over the life of the loan.