Why Extra Payments Are So Powerful
Most of your early mortgage payments go to interest, not principal — that's how amortization works. On a $320,000 mortgage at 6.5% for 30 years, your first payment of $2,023 includes $1,733 in interest and only $290 of principal. Every extra dollar you pay goes straight to principal, wiping out that disproportionate interest load early.
On a $320k loan at 6.5%/30yr: standard total interest = $408,807. With $200/mo extra: total interest = $350,290 — a saving of $58,517 and 5 years 8 months shorter payoff.
5 Strategies Ranked by Impact
- 1Round up every payment — pay $2,100 instead of $2,023. Small, painless, adds up to roughly one extra payment per year.
- 2Make one extra principal payment per year — a single $2,000 lump sum annually saves ~$30k on a $320k loan at 6.5%.
- 3Switch to bi-weekly payments — you make 26 half-payments instead of 12 full ones, effectively paying one extra monthly payment per year automatically.
- 4Apply windfalls directly to principal — tax refunds, bonuses, inheritance. Mark payments as 'principal only' with your lender.
- 5Recast your mortgage — after making a large lump-sum payment, ask your lender to re-amortize at the same rate. Monthly payment drops but term stays the same. Fee is usually $200–$500.
When You Should NOT Pay Off Early
Paying down a 6.5% mortgage is guaranteed 6.5% return (after-tax: closer to 5–6% once you lose the mortgage interest deduction). Compare that to your alternatives:
| Action | Expected return | Risk |
|---|---|---|
| Pay off mortgage early | 6.5% (mortgage rate) | None — guaranteed |
| Max out 401(k) with employer match | ~100% immediate on matched portion | Market risk |
| Max out HSA | Tax-free growth + deduction | Low (investment risk) |
| Pay off credit card at 20%+ | 20%+ guaranteed | None |
| Invest in S&P 500 index fund | 7–10% long-run average | Market risk, volatile |
1. Emergency fund (3–6 months expenses) 2. 401(k) up to full employer match (free money) 3. Pay off high-interest debt (>7%) 4. Max HSA if eligible 5. Extra mortgage payments 6. Max 401(k) / IRA 7. Taxable investing
The Recast vs Refinance Decision
If you come into a large sum — inheritance, business sale, stock vest — you have two options:
| Option | Cost | Rate changes? | Best when |
|---|---|---|---|
| Recast | $200–$500 fee | No — keeps existing rate | Your current rate is already low; you just want a lower payment |
| Refinance | 2–5% of loan | Yes — resets to market rate | Rates have dropped significantly since you bought |
Refinance if rates dropped more than 0.75% and you'll stay 3+ years. Recast if you want a lower payment without the cost and hassle of a full refinance.