Should I Pay Extra on My Mortgage Each Month?

Pros of Paying Extra on Your Mortgage

Paying more than the minimum on your monthly mortgage payment can benefit you in several ways, such as:

Faster Loan Payoff

Directing additional funds to your mortgage could shave years off your home loan. Generally speaking, making one extra payment each year on a 30-year mortgage can shorten your repayment timeline by four to five years.

Example: On a $350,000 mortgage at 6.5% with a monthly payment of $2,212, adding $184.35 to each month's payment would equal one extra payment each year. This strategy could reduce the loan term from 30 years to about 24 years and 2 months. That's 70 months earlier, giving you the chance to own your home outright almost six years ahead of schedule.

Interest Savings

Not only will you be mortgage-free sooner, but you'll pay significantly less by reducing your principal balance faster. In the above example, adding an amount to your monthly payment ($184.35) that equals one extra payment each year could lower your total interest by $101,654.

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Alexandria White

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"I pay an extra $500 a month toward my mortgage and will save $54,000 in interest and pay off my loan 7 years faster."

Reduced Debt-to-Income Ratio (DTI)

Paying extra on your monthly mortgage payment also brings down your debt-to-income ratio (DTI). This figure compares the total amount of your monthly debt obligations against your gross monthly income.

Lenders often consider your DTI when reviewing your application for new credit because it shows how well you manage debt. A lower DTI may improve your odds of approval if it shows you have more room in your budget to take on a new debt.

Learn more:How to Reduce DTI Before Applying for a Loan

Builds Home Equity Faster

The more you add to your monthly mortgage payment, the faster you build equity compared to the regular amortization schedule. Even modest monthly additions can make a meaningful difference over time. Having more equity may help you drop private mortgage insurance (PMI) sooner if your down payment was less than 20%. It could also make it easier to qualify for a home equity loan or home equity line of credit (HELOC), or increase your profit if you sell the home.

Learn more:How Does Mortgage Interest Work?

Cons of Paying Extra on Your Mortgage

While making higher payments on your mortgage can be advantageous, it's important to first consider the potential downsides.

Reduced Liquidity

You may not want to add extra money to your mortgage payments if you think you might need it in an emergency. Remember, getting money out of your home is a little harder than simply withdrawing it from your savings account. You'd either have to sell your home, refinance it or get a home equity loan or HELOC. That could take weeks or even months, which could put you in a bind if you're faced with an emergency.

Opportunity Cost

One counter against paying extra on your mortgage is that the money might earn more than you're paying in interest if you invested it elsewhere. For instance, if you took out your mortgage during the pandemic, there's a good chance your mortgage carries an interest rate below 4%. But the S&P 500 has averaged returns of 10.30% annually over the last 20 years, according to Vanguard. In this case, you might have earned more in the market than you would have saved by paying down your mortgage faster. Just keep in mind, future returns are never guaranteed.

Prepayment Penalty

Paying extra principal does not trigger a fee unless your loan charges a prepayment penalty. According to the Consumer Financial Protection Bureau (CFPB), a lender can't impose a prepayment penalty after the first three years, so you'd have to make significant overpayments to trigger this fee. Also, penalties are allowed only on certain qualifying fixed-rate loans. Check your mortgage terms or contact your servicer to confirm if there's a prepayment penalty and what its parameters are.

Less Funds for Other Goals

Before devoting more money to your mortgage payments, consider whether the funds might be better spent on other financial goals. You probably should hold off on sending extra toward principal if you don't have an adequately funded emergency fund, for example.

Would the added amount leave you with less money to save for retirement or a child's college tuition? Are you paying high-interest credit cards with higher rates than your mortgage?

Accelerating your payoff timeline and paying less in interest are good reasons to add more to your mortgage payment, but not if it jeopardizes your financial well-being.

Learn more:Reasons Not to Pay Off Your Mortgage Early

Mortgage calculator

When to Consider Paying Extra on Your Mortgage

Deciding whether to pay more on your monthly mortgage comes down to making sure it fits your budget and doesn't undermine your savings or other financial goals. It could be a good idea if:

• You have a high-interest mortgage. If you're paying a high mortgage rate, every extra dollar you apply toward your principal balance helps you reduce those charges and save money.
• You plan to stay in the home long term. The primary benefit of paying extra on your mortgage is the years you trim off the loan. You won't get that benefit if you plan on moving in the early years of your loan, so consider your timeline before putting more money toward the principal.
• You want to build equity faster. Adding more to your mortgage payment helps you pay down the principal sooner, which in turn builds equity in your home faster. This can help you reach the 20% equity threshold sooner to remove PMI from your monthly payment.
• You're approaching retirement. Reducing or eliminating what is usually your largest expense—your mortgage payment—could make your finances more manageable after you stop working. That said, if you're behind on your retirement goals, putting the extra funds into your retirement savings may be a better option.
• Your other financial bases are covered. Before paying extra on your mortgage, make sure your emergency and retirement savings are on solid footing. Similarly, paying off high-interest credit cards could save you more money than reducing your mortgage interest charges.

Tip: Before adding extra money to your mortgage payment, check with your loan servicer to confirm it will go toward the principal. Then review your statements each month to make sure the payment is being applied the way you intended.

How Much Extra Should I Pay on My Mortgage?

If you want to pay off your mortgage early and save a significant amount of interest, consider adding at least $100 to $200 to your monthly payment if you have room for it in your budget.

Example: If you have a 30-year, $300,000 mortgage at 6.5% and add $200 each month, you could pay off the loan six years early and save nearly $100,000 in interest. Doubling the extra amount to $400 could save you nearly $160,000 in interest over the life of the loan and pay it off 11 years sooner.

As a general rule, only add what you can comfortably afford each month without compromising your emergency fund, retirement contributions, a child's education or other essential expenses. If you're torn between paying off your mortgage faster and achieving other financial objectives, consider splitting the difference. Send some money to your home loan and the rest to other goals as needed.

Learn more:Why Paying Your Mortgage Biweekly Can Save You Money

Strengthen Your Finances and Your Credit

Paying extra on your mortgage each month could accelerate your repayment timeline and save substantial interest. As long as you don't stretch yourself too thin to make higher payments, you could strengthen your financial health with more home equity and a faster path to mortgage-free homeownership.

While you're improving your finances, don't forget about your credit health. Having good credit can help you qualify for a refinance or other types of credit with better rates and terms. Start by checking your Experian credit report and FICO^® Score^Θ for free. By reviewing your report, you can identify potential issues affecting your score and take steps to resolve them and improve your credit.