"Make one extra mortgage payment a year" sounds like a universal shortcut, but there is no universal savings number. The result can be modest on a small, low-rate loan near payoff and much larger on a higher-rate loan with many years remaining.
The Mortgage Extra Payment Calculator can model your own balance, rate, remaining term, and annual extra principal.
The short answer
One extra principal payment per year can shorten a fixed-rate mortgage because the extra amount reduces the balance that produces future interest. The regular scheduled payment then continues against a smaller balance.
The Consumer Financial Protection Bureau (CFPB) explains that when principal is reduced, the borrower owes less and pays less interest based on the smaller loan balance.
The useful question is not "Does it help?" The useful question is how much time and interest it saves on your particular mortgage.
What "one extra payment" should mean
For payoff math, treat the extra payment as additional principal. Do not simply send an extra copy of the total amount shown on a mortgage statement without knowing what is in that total.
A mortgage statement may combine principal and interest with property taxes, homeowners insurance, mortgage insurance, and other escrow amounts. Those non-loan expenses do not reduce the mortgage balance.
In this article, "one extra payment" means one extra principal payment equal to the regular monthly principal-and-interest payment.
A worked example
Consider a fixed-rate mortgage with:
- Current balance: $285,000
- Interest rate: 6.5%
- Remaining term: 25 years
- Calculated monthly principal and interest: about $1,924.34
With no extra payments, the modeled remaining schedule lasts 300 months and produces about $292,302 of interest.
Now add approximately $1,924 of extra principal after every 12th month. Under the same monthly fixed-rate model:
- The payoff falls from 300 months to 252 months.
- That removes about 4 years from the remaining term.
- Estimated remaining interest falls by about $54,178.
25 years remaining - 21 years modeled payoff
= about 4 years saved
This is an illustration, not a promise that one extra payment always saves four years. Change the rate, balance, remaining term, or extra amount and the answer changes.
Why the savings grow over time
Mortgage interest is calculated from the unpaid principal balance. An extra principal payment lowers that balance earlier than the original amortization schedule expected.
Monthly interest =
current principal balance × annual rate ÷ 12
The next scheduled payment therefore begins from a lower balance. Less of that payment is needed for interest, and more can reach principal. That smaller balance then carries forward into later months.
The effect compounds through the amortization schedule. This is why an extra payment with 20 years remaining usually has more opportunity to help than the same payment made with two years remaining.
Monthly extra vs. one annual payment
If the annual budget is fixed, sending some of the money earlier can save slightly more because principal is reduced sooner.
In the same example, one annual extra payment is about $1,924.34. Dividing that by 12 produces about $160.36 per month.
- About $1,924 once each year: roughly 4 years saved and $54,178 of interest avoided.
- About $160.36 every month: roughly 4 years 2 months saved and $56,690 of interest avoided.
The monthly version wins slightly in this model because part of the annual amount reaches principal before month 12. Actual posting dates and servicer practices can change the precise difference.
Do not include escrow in the extra payment
If the regular mortgage bill is $2,700 but only $1,924 is principal and interest, using $2,700 as the "extra mortgage payment" models a much larger principal contribution.
CFPB distinguishes the principal-and-interest payment from the total monthly mortgage payment, which can also contain taxes, homeowners insurance, and mortgage insurance.
Use the principal-and-interest amount when the goal is to model one extra payment applied to loan principal.
Make sure the servicer applies principal
CFPB and Fannie Mae both advise borrowers to make sure extra payments are applied to principal. Paying interest early while leaving principal unchanged does not create the same payoff benefit.
Review the servicer's payment instructions and then check the next statement to confirm that the principal balance declined as expected.
Also review the loan documents for a prepayment penalty. CFPB says prepayment penalties do not normally apply to small extra principal payments, but some loans can charge a penalty for early payoff or a large principal reduction under stated conditions.
Keep the rest of the financial picture visible
Mortgage interest saved is only one side of the decision. Extra principal becomes home equity and is generally harder to access than cash in a bank account.
Before committing to an annual extra payment, consider:
- Emergency savings
- Higher-rate debt
- Employer retirement-plan matching
- Near-term repairs and large purchases
- The value of keeping cash liquid
The Mortgage Payoff vs. Invest Calculator can compare extra mortgage principal with an investment scenario when that is the decision being considered.
Frequently asked questions
Does one extra mortgage payment a year always save several years?
No. The result depends on the mortgage balance, interest rate, remaining term, payment amount, and when the extra payment is made.
Should I make the extra payment in January or December?
Earlier principal generally has more time to reduce future interest. If the same amount is available in January rather than December, the earlier payment usually produces slightly more savings under a standard fixed-rate model.
Can I divide one extra payment into 12 monthly amounts?
Yes, if the servicer accepts extra principal that way. The same annual amount spread across the year can save slightly more because principal is reduced sooner.
Will an extra payment lower my required monthly payment?
Usually not by itself. Extra principal generally moves the payoff date forward when the scheduled payment continues. Mortgage recasting is a separate process that can recalculate the required payment after a principal reduction.
Where can I calculate my own savings?
Use the Mortgage Extra Payment Calculator and enter the extra amount in the annual-extra field.
Sources and further reading
- Consumer Financial Protection Bureau: Mortgage key terms, including principal
- Consumer Financial Protection Bureau: Mortgage servicer rules and extra principal
- Consumer Financial Protection Bureau: What is a prepayment penalty?
- Consumer Financial Protection Bureau: Principal and interest vs. total monthly payment
- Fannie Mae: Should I Make Extra Payments On My Mortgage?