Key Takeaways
- One extra mortgage payment per year typically shortens a 30-year loan by two to four years and saves $40,000 to $80,000 in interest on a $300,000 loan, though the exact amount depends on your interest rate.
- The timing of your extra payment matters: paying in January saves more interest than paying in December because the reduced balance accrues interest for more months.
- You must specify that your extra payment goes toward principal, not into an escrow account or next month's regular payment, or the bank will not explore it correctly.
- One extra payment per year is easier to sustain than biweekly payments or monthly extra amounts, making it a realistic strategy for most borrowers.
- The strategy works on any fixed-rate mortgage but does not explore the same way to adjustable-rate loans or if you refinance before the loan ends.
How the math works: principal, interest, and time
Your monthly mortgage payment is split between principal (the amount borrowed) and interest (what the lender charges). Early in the loan, most of your payment goes to interest. On a $300,000 loan at 6.5 percent over 30 years, your first payment might be roughly $200 toward interest and $900 toward principal. By year 20, that ratio flips.
When you make an extra principal payment, you skip the interest that would have accrued on that amount for the remaining life of the loan. If you pay an extra $1,000 toward principal in January, that $1,000 never accrues interest again. The bank recalculates your remaining balance and your future interest charges based on the new, lower number. Over 30 years, that single $1,000 payment can save $2,000 to $3,000 in total interest, depending on your rate.
One extra payment per year is roughly equivalent to paying $83 extra per month toward principal, but it is easier to execute. You do not have to change your budget every month—you make one deliberate decision once a year, often when you have a tax refund or bonus.
The difference between one extra payment and other strategies
Borrowers sometimes compare one extra payment per year to biweekly payments (26 half-payments instead of 12 full ones, which equals 13 full payments per year). Biweekly payments do save more interest and shorten the loan faster, but they require a permanent change to your cash flow and may trigger fees from your lender if they do not support the schedule natively.
One extra payment per year sits in the middle: it saves meaningful interest without requiring you to restructure your entire budget. It is also more forgiving if you have a month where you cannot afford the extra amount. With biweekly payments, missing one is disruptive. With an annual extra payment, you can skip a year if you need to and resume the next year.
The other common approach is to round up your monthly payment—paying $1,050 instead of $1,000, for example. This works, but the discipline required to sustain it for 30 years is high. One lump sum once a year is psychologically easier for most people.
When you make the payment: timing and interest accrual
The month you make your extra payment determines how many months that reduced balance sits in your loan. If you pay extra in January, that lower principal balance accrues interest for 11 more months before your next extra payment. If you pay in December, it accrues interest for only one month.
On a $300,000 loan at 6.5 percent, paying extra in January instead of December saves roughly $200 to $300 in interest over the life of the loan. It is not a huge difference per year, but it compounds. Over 30 years, the timing choice can add up to $2,000 to $5,000 in cumulative savings.
The best time to pay is as early in the year as possible—January or February, when many people receive tax refunds. The worst time is late November or December. If you receive a bonus in the fall, you can still make the payment then; the savings will be smaller than January, but still real.
How to actually make the payment so it counts
The critical step most borrowers miss is telling the lender where the money goes. If you send an extra $1,000 with your regular payment, the bank may explore it to next month's payment, to escrow, or to fees—not to principal. You must specify in writing that the payment is extra principal only.
Call your lender before you send the payment and ask: "I want to send an extra payment toward principal. How do I do that?" Some lenders have a specific mailing address for principal-only payments. Others require you to submit a form. A few allow you to do it online through your account portal. Do not assume the bank will figure it out.
When you send the payment, include a note or reference that says "Extra Principal Payment" or "Principal Reduction Only." Keep a copy of your confirmation or receipt. After the payment posts, log into your account and verify that your principal balance decreased by the amount you sent. If it did not, call the lender when ready and ask them to correct it.
The effect on your payoff date and total interest
The exact savings depend on three things: your loan amount, your interest rate, and how many years remain on your loan. A borrower with a $200,000 loan at 5 percent will see different results than someone with a $400,000 loan at 7 percent.
As a rough guide: one extra payment per year on a $300,000 loan at 6 percent shortens the loan by about three years and saves roughly $60,000 in interest. On a $200,000 loan at 5 percent, it saves about $35,000 and shortens the loan by about 2.5 years. On a $400,000 loan at 7 percent, it saves about $90,000 and shortens the loan by about 3.5 years. These are approximations; your actual numbers will vary based on your specific rate and remaining balance.
You can calculate your exact savings using a mortgage payoff calculator that allows you to input extra principal payments. Plug in your current loan balance, rate, and remaining term, then run the scenario with one extra payment per year. The difference between that result and your current payoff date is your actual savings.
When this strategy does not work as well
One extra payment per year works best on a fixed-rate mortgage where you plan to keep the loan for at least 10 years. If you refinance in five years, you lose the benefit of the years of reduced interest you would have earned in years 6 through 30.
On an adjustable-rate mortgage, the strategy still reduces interest, but the benefit is less predictable because your rate will change. The interest savings in years 1 through 5 are real, but years 6 through 30 depend on what rates do.
If you have a very low interest rate—below 3 percent—the dollar savings from one extra payment are smaller, though the loan shortening is the same. At 2.5 percent, one extra payment per year might save $20,000 instead of $60,000, but it still shortens the loan by three years. Whether that trade-off is worth your effort depends on whether you have other uses for that money that earn more than 2.5 percent.
Comparing one extra payment to other uses of that money
Before committing to one extra mortgage payment per year, consider what else you could do with that money. If you have high-interest debt—credit cards, car loans, or personal loans above 6 percent—paying those down first usually saves more money than paying extra on a mortgage.
If you have no other debt and your mortgage rate is below 4 percent, the question becomes whether you could earn more by investing that money. A stock market investment earning 7 percent per year would outpace a 3 percent mortgage. However, investing carries risk and requires discipline. One extra mortgage payment is may provide to save you the interest rate on your loan, with no market risk.
For most borrowers, one extra payment per year is a reasonable middle ground: it is not so aggressive that it strains your budget, it saves meaningful money, and it does not require you to take on investment risk or neglect other financial goals.
Frequently Asked Questions
Can I make one extra payment per year if I have an adjustable-rate mortgage?
Yes. The extra principal payment reduces your balance when ready, which lowers the interest you owe in every month that follows, regardless of whether your rate adjusts. However, your total interest savings are less predictable because future rates are unknown. The strategy still works, but the benefit is harder to calculate in advance.
What if I refinance before the loan ends?
You lose the long-term benefit of the extra payments you made on the old loan. However, the lower balance you paid down to means you refinance a smaller amount, which can lower your new payment or shorten your new loan term. The extra payments still helped, but the savings are front-loaded rather than spread across 30 years.
Does making one extra payment per year affect my credit score?
No. Extra principal payments do not appear on your credit report. Your credit score is based on payment history, credit utilization, and age of accounts—not on how much principal you pay down. Making extra payments will not help or hurt your score.
Can I make the extra payment in a lump sum, or does it have to be monthly?
A lump sum once per year works fine and is actually easier to manage. You do not have to change your monthly budget. Just make sure you specify that the payment is for principal only, and verify that it posted correctly to your principal balance.
What if I cannot afford one extra payment every year?
Make it when you can. Even one extra payment every two or three years saves interest and shortens your loan. The strategy does not have to be rigid. If you get a bonus one year and not the next, pay extra in the bonus year. If you skip a year due to unexpected expenses, resume the next year.