What an extra payment does
Every dollar paid above the required payment reduces principal immediately, and interest is charged on principal. So an extra payment saves the interest that dollar would have accrued every month for the rest of the loan, which is why the effect is largest early in a long loan and modest near the end.
Worked example (pre-filled). A $250,000 loan at 6.5% for 30 years requires $1,580.17 a month and costs $318,861.58 in interest over 360 months. Paying $1,780.17 instead, $200 extra, clears the loan in 265 months (22.08 years), 95 months (7.92 years) early, and cuts total interest to $221,243.14: a saving of $97,618.44.
The calculation assumes the lender applies the extra amount to principal (most do, but some apply it to the next payment unless told otherwise) and that there is no prepayment penalty. It does not compare the extra payment with other uses of the money. This page computes; it does not recommend a loan, lender, investment or tax position. The loan calculator shows the original schedule in full.
Formula and assumptions
each month: interest = balance × r; principal = required + extra − interest
stop when the balance reaches zero; interest saved = original interest − new interest
- The extra amount is paid every month from the first payment onward.
- Fixed rate, monthly compounding, extra applied to principal in the same month.
Frequently asked questions
How much does $200 extra a month save on a 30-year mortgage?
On $250,000 at 6.5%, about $97,600 of interest, and the loan is paid off in 265 payments instead of 360, 7 years 11 months early.
Is it better to pay extra monthly or once a year?
Mathematically, the sooner principal is reduced the more interest is saved, so monthly extras save slightly more than the same total paid once at year end.
Does an extra payment lower my monthly payment?
Not on a standard fixed loan; the required payment stays the same and the loan ends earlier. Some lenders offer recasting to lower the payment instead.
Do I need to tell the lender to apply it to principal?
Often yes. Check that the extra is posted as a principal reduction rather than held as a prepayment of next month’s installment.
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Sources
This calculator gives general estimates from the figures you enter. It is not tax, legal, payroll or financial advice. See our disclaimer.