Mortgage Payoff Calculator

The required payment is worked out first from the balance, the rate and the years left. Then two schedules are run month by month: one at that payment, one at that payment plus your extra. Each month, interest is the balance times the monthly rate, the payment covers that interest first, and what is left comes off the balance. An extra dollar skips the interest queue entirely and goes straight against principal, so it cancels every future charge that dollar would have attracted.

Why does 250 dollars a month save so much more than 250 times the number of months?

Because each extra dollar removes all the future interest on that dollar. Early in a 30 year mortgage at 6.5 percent, a dollar of principal paid today saves about six dollars of interest over the rest of the term. You are not buying down the balance, you are canceling the compounding on it.

Is it better to pay extra or invest the money?

Paying the mortgage is a guaranteed, tax-free return at your interest rate. Investing has a higher expected return and no guarantee. The honest answer depends on your rate: at 3 percent, invest; at 7 percent, the mortgage is hard to beat on a risk-adjusted basis. Clear high-interest debt before either.

Do I need to tell the lender the money is for principal?

Usually yes. Unless you mark an extra payment as principal-only, many servicers hold it as a prepayment of next month or park it in escrow, which saves you nothing. Check the first statement after you start, not the twelfth.

What about biweekly payments?

Paying half the payment every two weeks means 26 half payments a year, which is 13 full ones instead of 12. It is the same as adding a twelfth of your payment each month, with a fee attached if a third-party service arranges it. Set up the extra yourself and keep the fee.