How Making One Extra Mortgage Payment Each Year Can Save You Thousands

If you have a mortgage, you probably know that the loan is set up to be paid off over a long period, usually 15 or 30 years. Every month you send in a payment that covers both the interest you owe and a small piece of the actual loan amount, called the principal. Over time, the balance slowly drops. But what if you could speed that up without putting a big strain on your budget? One of the simplest strategies is to make one extra payment every year. This one small change can save you a huge amount of money and cut years off your mortgage term.

To understand why this works, you need to see how your monthly payment is split. In the early years of a mortgage, almost all of your payment goes toward interest. The bank gets paid first, and only a tiny fraction chips away at what you actually borrowed. That means it takes a long time before you start building real equity in your home. When you send in extra money that is applied directly to the principal, you skip paying future interest on that amount. Every dollar you pay early is a dollar that will never have interest charged on it again.

Let’s look at an example with numbers that make sense for a typical homeowner. Suppose you have a 30-year fixed-rate mortgage for $250,000 at an interest rate of 6 percent. Your monthly payment for principal and interest would be about $1,500. Over the entire 30 years, you would end up paying almost $290,000 in interest alone. That is more than the original loan amount. Now imagine you make one extra payment each year. That extra payment is also $1,500, but it all goes to principal because your regular payment already covers the interest due. If you do this every year, you would pay off your mortgage in about 24 years instead of 30. You would save roughly $49,000 in interest. That is real money you could use for retirement, college, or anything else.

The beauty of this strategy is how easy it is to set up. You do not have to come up with a huge lump sum. You simply take your regular monthly payment and make one extra one sometime during the year. Many people choose to do it with their tax refund or a year-end bonus. Others set up a biweekly payment plan where you pay half your monthly amount every two weeks. Because there are 26 half payments in a year, that works out to 13 full payments instead of 12. That is the same as one extra payment per year, but it might feel less painful because the money comes out automatically. Just make sure your lender applies the extra amount to principal, not to the next month’s payment. You have to specify that when you send the money.

Some homeowners worry that they will lose the tax deduction for mortgage interest if they pay off their loan faster. That is a valid thought, but you need to weigh the benefit. The mortgage interest deduction reduces your taxable income, but only if you itemize deductions. Many people today take the standard deduction because it is higher. And even if you do itemize, the amount you save on interest is usually less than the savings you get from not paying that interest in the first place. In other words, you are better off keeping the money in your pocket than giving it to the bank just to get a smaller tax break.

Another concern is whether your money could earn more if invested elsewhere. That depends on your mortgage rate and your investment returns. Right now, mortgage rates are higher than they have been in years, often above 6 or 7 percent. Earning a guaranteed return of 6 percent by paying down your mortgage is hard to beat with risk-free investments like savings accounts or CDs. Yes, the stock market might earn more, but it also comes with risk. If you are the type of homeowner who prefers certainty, extra principal payments give you a guaranteed savings. Plus, owning your home free and clear brings peace of mind.

One mistake people make is thinking they have to commit to an extra payment every single year. You can start small. Even an extra $50 or $100 per month, applied to principal, adds up. That monthly extra amount combined can equal one extra payment without you even noticing. The key is consistency. Over time, the effect compounds because you are reducing the balance on which future interest is calculated. The earlier you start, the bigger the impact.

There is a downside to consider. If you have other high-interest debt like credit cards or personal loans, those should come first. Paying off a mortgage faster is a long-term goal. You also need an emergency fund. Tying up all your extra cash in your home might leave you short if an unexpected expense comes up. So make sure you have a cushion before you start sending extra payments. Once you have that safety net, however, making one extra mortgage payment each year is one of the smartest, most straightforward moves you can make. It turns a 30-year weight into something you can lift off your shoulders years sooner. And all it takes is one extra check.