How to use the extra payment calculator
The Extra payments tab shows what prepaying does to your loan. The Lower rate or shorter term tab compares two ways of paying less interest.
The example is a mortgage with $250,000 left at 6.5% and 25 years to go, with an extra $200 every month and $1,000 once a year.
- The loan as it stands today. Enter the current balance and the years left, not the original amount and term. Your latest statement or online account shows both. Decimals work: 22.5 years is 22 years and 6 months.
- Extra payments. Combine any of the three: a fixed amount every month, a yearly amount such as a tax refund or bonus, and a one-time payment now. Leave a box empty to skip it.
- Prepayment penalty. Most home loans have none, so the default is 0. If your loan has one, enter the percentage of the extra principal it charges and how many years it lasts.
The chart shows the balance with and without the extra payments. The table below it gives the extra paid, the interest and both balances each year, with the interest saved so far.
How the savings are calculated
The regular payment comes from the remaining balance, rate and months left. Each month, interest is charged on the balance, and anything paid above the interest reduces it:
Interest this month = Balance × i
New balance = Balance − (M − Interest) − Extra principalB is the current balance, i the annual rate ÷ 12 and n the months left. Extra principal is the monthly extra, plus the yearly extra with every 12th payment; a one-time payment comes off the balance at the start.
The calculator runs the loan twice, with and without the extra payments, and compares the results:
Penalty = Penalty % × Extra principal paid during the penalty period
Net savings = Interest saved − Penalty
A worked example
At 6.5% with 25 years left, the regular payment on $250,000 is $1,688.02. Paid as scheduled, the loan would cost $256,405 in interest.
Adding $200 a month and $1,000 a year brings total interest down to $174,793, a saving of $81,612. The loan is gone in 18 yr instead of 25 years, 7 yr sooner.
Over that time you prepay $60,181 of principal, so each extra dollar saves about $1.36 of interest. After five years the balance is $206,555 instead of $226,405.
Small amounts, large effects
Even modest amounts save tens of thousands of dollars, because each dollar of principal you clear stops collecting interest for every remaining month of the loan.
| Extra payment | Interest saved | Paid off sooner by |
|---|---|---|
| $100 a month | $37,671 | 3 yr 1 mo |
| $200 a month | $64,928 | 5 yr 6 mo |
| $500 a month | $115,668 | 10 yr 1 mo |
| $1,000 once a year | $30,793 | 2 yr 7 mo |
| $20,000 once, now | $67,816 | 4 yr 4 mo |
Timing matters as much as the amount. A one-time $20,000 paid today saves more than many people expect, because it has the full remaining term to work. The same sum paid ten years from now would save far less. That is why extra payments early in a loan, when the balance is largest and most of each payment is interest, are the most powerful.
The rate matters too. The same extra $200 a month and $1,000 a year saves $41,968 on a 4% loan and $111,546 on an 8% loan, with the payoff brought forward by 6 yr 6 mo and 7 yr 4 mo respectively.
Prepayment penalties
A prepayment penalty is a fee for repaying principal ahead of schedule. Lenders use it to protect the interest they expected to earn. In the US, penalties on home loans are now uncommon: government-backed FHA, VA and USDA loans do not allow them, and federal rules for qualified mortgages limit penalties to the first three years, at no more than 2% of the amount prepaid in years one and two and 1% in year three. Some contracts also allow a share of the balance to be prepaid each year without any fee.
With a 2% penalty during the first three years, the example’s extra payments cost $204 in penalties and still save $81,408 net. If the same 2% applied for the life of the loan, the penalty would be $1,204, leaving net savings of $80,408.
A penalty rarely wipes out the benefit of prepaying a long loan, because the interest saved is many times the fee. It matters more on a short loan, or when the penalty is charged on the whole balance rather than only the amount prepaid. When a penalty period ends soon, one option is to save the extra money in a high-yield account and pay it in as a lump once the period is over.
Lower rate or shorter term?
The second tab compares two different routes to less interest on the same $250,000 balance with 25 years left at 6.5%.
- A lower rate on the same term, usually through a refinance, lowers the payment to $1,535.22 and saves $45,840.
- The same rate over a shorter term, by refinancing to a shorter loan or simply paying $175.91 more each month, saves $59,061.
In the example the shorter term wins, but it asks more of your monthly budget, while the lower rate saves interest as you pay less. A larger rate cut changes the answer: dropping to 4.5% saves $89,531, against $35,866 for repaying in 22 years. Doing both saves $93,673.
The rate route usually has closing costs that the comparison leaves out; the mortgage refinance calculator includes them and finds the break-even month. Paying extra on your current loan costs nothing to set up and can be stopped at any time.
Before you prepay
Paying down a loan early earns a guaranteed return equal to its interest rate: on a 6.5% mortgage, every prepaid dollar earns 6.5% a year with no market risk. But money paid into a loan is hard to get back: you cannot withdraw it if you lose your job, and borrowing it out again through a home equity loan costs fees and interest.
A sensible order for many households is an emergency fund first, then any employer match on retirement contributions, then high-rate debts such as credit cards, which our debt payoff calculator can plan. After that, compare your loan’s rate with the after-tax return you could reasonably expect from investing. Also tell your servicer that extra money is for principal; otherwise some apply it to next month’s payment instead.
What this calculator does not include
- Variable rates. The rate is fixed for the remaining term.
- Taxes. Prepaying reduces any mortgage interest deduction you claim.
- Recasting. The regular payment stays the same; a recast would lower it instead of shortening the loan.
- Precomputed-interest loans. Some auto and personal loans calculate interest upfront, so prepaying saves less than shown.
- Escrow. Property tax and insurance are paid on top and are not affected by extra principal.