Here's What Happens When You Make an Extra Mortgage Payment

A typical mortgage has a 30-year term, meaning you don't actually own your home until you've made payments for roughly a third of your life. So it makes perfect sense you might consider making some extra mortgage payments -- i.e., payments in addition to your required monthly payments -- a few times a year to try and shorten your sentence.

Most mortgage lenders will be happy to let you make extra payments. Modern mortgages rarely include prepayment penalties. But just because you're allowed to make extra payments doesn't mean it's the right move.

Here's a look at what happens when you make extra mortgage payments.

Designated early payments

Any mortgage payment you make over and above your regularly monthly payment will still be applied to the current month. They're considered to be extra payments and not early payments. In other words, making an extra payment in May doesn't mean you can pay less in June. You'll still be expected to make your regular June payment.

In most cases, if you want to prepay your mortgage payment for a future month, perhaps because you'll be on vacation, you'll need to contact your mortgage lender. It can specifically designate your additional payment as an early payment so it correctly applies to the next month.

Paying down your principal

The fact that extra payments count toward the current month is actually a good thing. It means those additional funds go entirely toward paying off your loan principal. 

What many folks don't realize is that a big portion of your ordinary monthly mortgage payment actually goes to paying the interest fees (especially in the first few years). Since only a small portion of your payment goes to the principal, it can take years to make much progress.

Even one or two extra mortgage payments a year can help you make a much larger dent in your mortgage debt. This not only means you'll get rid of your mortgage faster; it also means you'll get rid of your mortgage more cheaply. A shorter loan = fewer payments = fewer interest fees.

You can -- but should you?

Alright, so we've seen what happens when you make extra payments. Now it's time to consider if it's actually a good idea. While there are certainly benefits to making extra payments, it might be the wrong move for some homeowners.

For instance, if you were lucky enough to pick up a mortgage when rates were at record lows -- they got down into the 2% to 3% range before they spiked again -- then making extra mortgage payments may not be the best use of your money. Instead, you should work on paying off other (read: higher interest) debts. 

If you're debt free (good job!), that money could probably be better used in a retirement or brokerage account. Barring all that, even just putting that money in a high-yield savings account could provide double the return on your investment than you'd get from extra payments on a low-interest mortgage loan.

That being said, if your mortgage has a higher interest rate -- current rates are over 6% -- well, then that could be a different story. You'll be hard-pressed to get a 6% return on a savings account, so it could be beneficial to make a principal-only payment a few times a year.