Extra $200 a Month on a Mortgage: Savings

Adding a little to your mortgage payment each month feels small, but the effect compounds. Here is what an extra $200 a month, or one extra payment a year, does to a typical loan.

The baseline loan

Take a $300,000 loan at 6.5% for 30 years. The principal-and-interest payment is about $1,896.20. Paid on schedule, you make 360 payments and pay about $382,600 in interest.

Option 1: an extra $200 every month

Paying $2,096.20 instead of $1,896.20 sends the extra $200 straight to principal. The loan is paid off in about 277 months, or 23 years and 1 month. Total interest drops to about $279,200. That is roughly $103,400 less interest and almost 7 years shaved off the term.

Option 2: one extra payment a year

Making one additional full payment of $1,896.20 each year, which is the same as 13 payments instead of 12, pays the loan off in about 292 months, or 24 years and 4 months. Interest falls to about $298,600, saving roughly $84,000 and about 5 years and 8 months.

Why it works

Interest is charged on the balance you still owe. Every extra dollar of principal lowers that balance right away, so you stop paying interest on it for the rest of the loan. The earlier you start, the more months that saving repeats, which is why an extra $200 in year one is worth far more than the same $200 in year twenty.

Before you send extra money

Confirm with your servicer that extra funds are applied to principal, not held toward next month, and that there is no prepayment penalty. Also weigh it against other goals such as an emergency fund, high-interest debt or retirement contributions that may earn more than 6.5%.

Run your own numbers with the amortization calculator and compare a lower rate using the refinance calculator. For how the interest and principal split works, read how a mortgage amortization schedule works. Figures are estimates, not financial advice.