What Happens When You Make an Extra Mortgage Payment?

As of February 2023, the typical monthly mortgage payment for a median-priced home was $1,880, according to the National Association of Realtors. Your monthly payments, however, may be higher or lower depending on the cost of your home and the mortgage rate you locked in.

Now, one good thing about most mortgage agreements these days is that they don't penalize borrowers for paying off their loans early. So, let's say you sign a 30-year mortgage and really want to try to pay off your home in 25 years. In most cases, you can do so without an early payment penalty.

But what exactly happens when you make an extra payment on your mortgage? Does it reduce your next mortgage payment, or simply lead to an expedited payoff date? Here's what you need to know.

Extra mortgage payments could go a long way

Making an extra payment on your mortgage generally will not get you out of making a future one. So let's say your monthly payment is $2,000, only in May, you're able to make a second $2,000 payment after getting your tax refund.

That extra payment won't necessarily mean that you don't have to send over a $2,000 payment in June. If you want your extra payment to be considered an early payment, you'll need to reach out to your loan servicer and make that known.

Otherwise, what will generally happen when you make an extra mortgage payment is that your funds will be allocated to cover the principal portion of your loan. Normally, when you pay your mortgage, some of the money you send over is applied to your loan's principal, and some is applied to the interest portion.

An extra payment, however, will generally be applied to the principal only -- and you can always reach out to your loan servicer and make sure that's the case. From there, you'll end up lowering the amount of interest you pay on your mortgage over time. That's because interest is calculated based on your loan's principal amount, and if it shrinks, you'll owe a little less interest.

Plus, if you continue to make extra payments on your mortgage, you might shrink your repayment window quite a bit. In fact, even a single extra mortgage payment could make it so you're carrying that debt for less time.

Should you make an extra mortgage payment?

If you're in a good spot financially and have spare cash on hand, then it could pay to put that extra money into your mortgage on a one-off basis. But if your savings need work or you have costlier debt, like a credit card balance, then it generally pays to put your money into the bank or pay down your credit cards rather than make an extra mortgage payment.

What's more, if you happen to have a very low interest rate on your mortgage, then it may not make sense to make extra payments. Say you signed a mortgage at 3%, and you're now getting 3.5% interest in your savings account. In that case, it's more beneficial to just keep your money in the bank.

Ultimately, extra mortgage payments could allow you to shed your home loan debt sooner and spend less on interest. But if you have other financial objectives to tackle, it could make sense to prioritize those over paying more money into your mortgage.