Key takeaways
- Prepaying a mortgage means paying extra, either in periodic installments or a lump sum, with the goal of paying back what you borrowed ahead of schedule.
- Paying extra on a mortgage also means paying less in interest over time, but it does come with some drawbacks, like less liquid capital.
- Before making an extra mortgage payment, it's important to evaluate your full financial situation.
When you take out a mortgage, you’re agreeing to buy a home on the installment plan — borrowing a large sum, then paying it back over years or even decades. But what if you’d like to settle that debt ahead of schedule?
Prepaying your mortgage means doing just that. Basically, it means sending extra mortgage payments to your lender to pay down your loan principal faster. Not only does it get you out of debt quicker, but it’ll also help you save money by reducing interest charges and the total amount of interest you’ll pay.
What does it mean to prepay a mortgage?
Prepaying a mortgage is a fancy term for a simple financial concept: paying off your loan early.
When you pay your mortgage, you send a specific amount to your lender (or mortgage servicer) each month. Your regular mortgage payment includes both the loan principal and interest. The size of these payments (which is usually fixed in the classic 30-year mortgage) and the percentage that goes to principal and interest (which vary over the loan’s lifetime) are figured on your amortization schedule.
When you’re paying extra on a mortgage, you’re going above and beyond the regular monthly amount. The money you send is meant to apply directly to the loan principal, not the interest. And paying additional principal on a mortgage means saving money. When the principal amount shrinks, the dollar amount of interest on it declines, too. This slashes the total interest you’ll owe over the life of the loan.
Example: How much you can save by prepaying your mortgage
Here’s an example of how prepaying a mortgage saves money and time: Kaylyn takes out a $400,000 mortgage at a 7.88 percent interest rate. The monthly mortgage principal and interest total $2,902. Here’s what happens when Kaylyn makes extra mortgage payments:
| Payment method | Pay off loan in … | Total interest | Total interest saved |
|---|---|---|---|
| *Extra $2,902 payment | |||
| Minimum every month | 30 years | $644,600 | $0 |
| 13 payments a year* | 22 years, 11 months | $462,796 | $181,804 |
| $100 extra every month | 26 years, 6 months | $553,901 | $90,699 |
| $50 extra every month | 28 years, 2 months | $594,969 | $49,631 |
| $25 extra every month | 29 years, 1 month | $618,529 | $26,071 |
Our mortgage amortization schedule calculator can help you determine the impact of extra mortgage payments on your lender. Click the “Optional: Make extra payments” dropdown to reveal the section that allows you to calculate the effect of additional payments.
Use our mortgage payoff calculator to see how much interest you can save by paying extra on a mortgage.
How to prepay a mortgage
There are two primary ways to make extra payments on your mortgage. One way involves making two biweekly payments toward your mortgage instead of a single monthly payment. The other way involves making an extra monthly payment, or a series of them.
Make sure your lender knows the extra payment should go toward paying down the loan’s principal. Lenders typically have this option online or have a process for earmarking checks for principal payments. If you don’t specify that the extra payments should go toward the mortgage principal, the additional money will go toward your next monthly mortgage payment. That means it will get split between principal and interest, making it less impactful for your goal of paying off your loan early.
You can take several routes for prepaying a mortgage:
Make an extra mortgage payment every year
With biweekly mortgage payments, you make a payment toward your mortgage every two weeks. If you pay half of your minimum payment with each payment, you’ll always make your minimum monthly payment.
Over the course of a year, you’ll make 26 biweekly payments, which equals 13 monthly payments. In effect, you’d make an extra mortgage payment each year.
Add extra dollars to every payment
You can also pay more toward your monthly loan balance. For example, if your loan’s minimum payment is $2,000, you can set up a monthly payment of $2,200. Each month, the extra $200 will pay down your loan’s principal and help you pay it off more quickly.
Apply a windfall lump sum
Come into an unexpected bunch of cash — an income tax refund, a bequest or inheritance, a work bonus or any other type of windfall? Put that lump sum toward your mortgage principal. You can apply it however you want, whether that’s in a single big monthly payment or bigger biweekly payments. Or, you can choose to shake up your whole mortgage schedule (see below).
Recast your mortgage
Recasting your mortgage works if you have a large sum you can pay toward your mortgage. Unlike simply making bigger or more frequent payments yourself, a mortgage recast involves your lender changing your loan terms.
To recast your mortgage, you will need to put down a certain amount of money in cash or make a specific number of payments. When you do this, the lender then re-amortizes your loan and creates a new monthly repayment schedule based on the recasting. You’ll pay your new repayment amount over the (current) lifetime of the loan based on the lower amount of principal left.
When you recast a mortgage, you will still have the same number of payments, and the same number of years before settling the mortgage. But because the lump sum payment has decreased your principal, your monthly payments will go down.
What is the prepayment penalty?
A prepayment penalty is a fee that some lenders charge when you pay off your mortgage early. Typically, the prepayment penalty only applies to paying off your mortgage in full or making a significant lump sum payment within three to five years of the loan’s origination. Making extra payments at regular intervals usually does not trigger a prepayment penalty.
Not all lenders have mortgages that come with a prepayment penalty. But if your mortgage has one, it would have been stated in the contract you signed when you borrowed the money. If you’re thinking about getting a mortgage with a prepayment penalty, make sure you understand when the penalty applies and how much the fee costs.
Pros and cons of prepaying your mortgage
If you have a little wiggle room in your budget, you might be asking, “Should I pay extra on my mortgage?” To help you decide, consider some benefits and drawbacks of making an extra mortgage payment:
Pros of prepaying your mortgage
- Owe less interest, saving you money over the life of the loan
- Finish paying off your mortgage sooner
- Build equity in your home faster
- Reduce your debt-to-income (DTI) ratio, which can make it easier to get better terms on other loans (e.g., a car loan)
- Get rid of private mortgage insurance (PMI) faster, if you’re currently paying for it
Cons of prepaying your mortgage
- Possibility of being subject to a prepayment penalty
- Less liquid capital
- Potentially losing out on opportunities to build a nest egg or emergency fund
- A smaller tax break from your mortgage interest deduction
Should you prepay on your mortgage?
When deciding whether to start paying extra on a mortgage, look at your entire financial picture. Here are some important questions to consider:
- Is your monthly budget tight after meeting necessary expenses?
- Is your income variable or unpredictable?
- How long do you plan to stay in your home?
- Are you saving enough for retirement?
- Do you have an adequate emergency savings fund for three to six months of household living expenses?
- Do you have credit card balances or other loans with a higher interest rate?
If you answered yes to any of these questions, it may be best to wait until you are more financially secure to consider prepaying your mortgage. If you answered no, and your accounts are all in order, it may make financial sense to start a mortgage prepayment plan.
FAQ about prepaying your mortgage
Once you fully pay off your mortgage, you’ll lose the tax deduction you might have been getting from the mortgage interest you paid in any given year if you itemized your deductions. If you get a chunk off your taxes because of your mortgage interest, you may want to consult with a CPA before you start paying extra on a mortgage.
Prepaying mortgage loans doesn’t impact credit scores in a significant way. Your credit score looks at whether or not you make payments on time, but it doesn’t factor in early payments.
Technically, you can pay as much as you want. But if your mortgage has a prepayment penalty, paying too much might mean you need to pay that fee.
Usually, no. You’re still locked into the monthly payments you’ve committed to with your lender until you’ve paid off the loan in full.
