Reviewed by: David Chen, CFA
Financial Analyst specializing in real estate investment and mortgage planning.
Use this interactive calculator to see how much time and interest you can save by making additional principal payments on your mortgage. Accelerate your path to debt freedom!
Mortgage Calculator with Extra Payments
Calculation Details
Mortgage Payment Formula
The standard monthly payment (M) is calculated using:
$$M = P \frac{r(1+r)^n}{(1+r)^n – 1}$$
Where: P = Principal, r = monthly rate, n = total number of months.
Variables Explained
- Loan Principal ($): The initial amount borrowed for the mortgage.
- Annual Interest Rate (%): The yearly interest rate applied to the loan.
- Initial Loan Term (Years): The original scheduled length of the loan (e.g., 15 or 30 years).
- Extra Monthly Principal Payment ($): The fixed amount added to your regular monthly payment, applied directly to the principal balance.
Related Calculators
Explore other tools to optimize your home financing strategy:
- Loan Amortization Schedule Calculator
- Refinance Savings Calculator
- Rent vs. Buy Analysis Tool
- Debt-to-Income Ratio Estimator
What is “Paying Extra” on a Mortgage?
Making an extra payment on your mortgage means paying more than the required minimum scheduled payment. Critically, these extra funds must be designated to go directly towards reducing the loan’s **principal balance**. By paying down the principal faster, you reduce the amount of money interest is calculated on, which dramatically lowers the total interest paid over the life of the loan.
This strategy is one of the most effective ways to save thousands of dollars and shorten your loan term significantly. Every dollar of extra payment works against the principal, which in turn reduces your future interest obligations, creating a powerful compounding effect in your favor.
It is essential to check with your lender to ensure they correctly apply the extra funds as a principal-only payment and that your loan does not have prepayment penalties.
How to Calculate the Savings (Example)
- Determine the Standard Payment: Calculate the regular monthly payment ($M_{\text{standard}}$) based on the initial principal, rate, and term.
- Calculate Total Payment: Add the standard payment to your intended extra principal payment ($M_{\text{total}} = M_{\text{standard}} + \text{Extra}$).
- Find the New Term: Use the amortization formula in reverse to determine how many months ($n’$) it takes to pay off the principal with the new, higher total payment ($M_{\text{total}}$).
- Calculate Interest Paid: Multiply the new number of payments ($n’$) by the total monthly payment, then subtract the original principal to find the new total interest paid.
- Calculate Savings: Subtract the new total interest paid from the original total interest paid to determine the total savings.
Frequently Asked Questions (FAQ)
Is an extra payment always applied to the principal?
No. You must explicitly instruct your lender that the extra funds are a principal-only payment. Otherwise, they might hold the funds or apply them to your next month’s total payment, which does not maximize your interest savings.
What is the best frequency for making extra payments?
The most impactful is a fixed extra amount paid monthly, as it maximizes the compounding benefit. However, paying bi-weekly (half a payment every two weeks) or making one extra lump sum payment per year also yields substantial savings.
Should I pay extra or invest the money?
This is a risk tolerance question. Paying extra guarantees a return equal to your mortgage interest rate (e.g., 6.5%). Investing offers potentially higher, but not guaranteed, returns. Many financial advisors suggest paying off high-interest debt first.
Are there tax implications for accelerating payments?
Reducing your total interest paid means you have less mortgage interest to deduct on your taxes (if you itemize). However, the money saved by reducing the principal generally outweighs the lost tax deduction.