Why it works at all
Interest rides on the balance you still owe. Pay extra principal and the balance drops on the spot, so every month of interest after that is figured on a smaller number. The saving repeats for the rest of the term, which is how even small extra payments snowball into real money.
Timing beats size
An extra payment early wipes out interest that would have piled up across the whole remaining term, so a dollar prepaid in year two does far more than a dollar prepaid near the end. If you only get one shot at it, take it early.
| Standard total interest | ~231,700 |
| With +100/month extra | ~180,800 |
| Interest saved / time saved | ~50,900 / ~5 years |
Two ways to use the extra
Lenders typically let you shorten the term — keep the payment, finish sooner — or recast to a lower payment, keeping the term but easing the monthly amount. Shortening the term saves the most interest; recasting loosens cash flow. Find out which your lender offers and how to ask for it, because the default isn't always the one you want.
Check these before you overpay
- Is there a prepayment penalty quietly eating the saving?
- Would the cash do more as an emergency fund, or invested above the loan rate?
- Is there higher-rate debt that should get the money first?
Make sure it lands on principal
None of this works unless the extra is applied to principal rather than parked as next month's payment. Tell the lender where it goes, then check the next statement and confirm the balance fell by the full amount.
What people underestimate is timing. The same extra payment saves far more in year two than in year twenty, because it removes interest for every month that's left. If you're going to prepay at all, earlier beats bigger-but-later.
Frequently asked questions
Do extra payments reduce my required payment?
Usually they shorten the loan instead, unless the lender recasts it. A recast keeps the term but lowers the monthly payment.
When is prepayment most effective?
Early in the loan, when the balance and interest are highest. The same extra amount saves much less near the end.
Is prepayment always worth it?
Not if there is a steep penalty, if the cash is needed for emergencies, or if you hold higher-rate debt that should be cleared first.
How do I make sure extra goes to principal?
Instruct the lender to apply it to principal and confirm on your next statement that the balance fell by the full amount.
Prepayment savings here re-run the amortization schedule after the extra is applied to principal; real savings depend on timing, any fee and how your servicer credits payments.
Treat this as background, not advice — it isn't financial, tax or lending guidance. Your bank or lender sets the actual rates, fees and approval terms, so check any number against a written offer before you commit.