Every way of paying extra, priced
| What you do | Loan lasts | Interest | Saved |
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Biweekly means half the payment every two weeks, which is 26 half-payments, or 13 monthly payments a year.
Finish by a date
Pay it down, or invest it?
Paying extra is the only lever most borrowers have once the loan is signed, and it is a powerful one: every dollar of principal you remove early stops being charged interest for the rest of the term. This page prices each way of doing it against your own loan.
Tell the servicer where the money goes
This is the part that catches people out. A payment is normally applied to fees first, then interest, then principal. Send extra money without instructions and the servicer may simply treat it as your next payment arriving early, which does nothing for the balance. The CFPB's advice is to instruct the lender to apply the extra directly to the principal, in writing where possible.
Also check for a prepayment penalty. They are less common than they were, usually apply only in the first few years, and small regular overpayments often do not trigger them, but the agreement is the only place to find out.
A mortgage has an extra wrinkle
If your payment includes escrow for property taxes and insurance, only the principal and interest part is the loan. Extra payments reduce the principal, not the escrow, so your monthly bill will not fall; the loan simply ends sooner. Put the principal-and-interest figure into the calculator above, not the full bill.
There is an alternative worth knowing about: a recast. You pay a large lump sum and the servicer re-amortizes the loan over the remaining term, which lowers the payment while keeping the rate. Fannie Mae's guidance covers it, and some servicers offer it with no fee; it is not available on FHA, VA or USDA loans. A recast lowers the payment. Extra payments shorten the loan. They are different goals.
Biweekly payments, and the people who sell them
Paying half your payment every two weeks produces 26 half-payments a year, which is 13 monthly payments instead of 12. The extra payment is where all the saving comes from, and you can do the same by adding a twelfth of a payment each month, for free.
Companies charge for arranging this. In 2015 the CFPB sued one for a setup fee of up to $995 plus annual fees, on a service worth nothing extra: the regulator noted a borrower would have to stay enrolled for years before the savings covered the fees.
Paying down debt against investing
The arithmetic is simple, even when the decision is not. Paying down a loan is a guaranteed return equal to the loan's rate. Investing has a higher expected return, but it is not guaranteed and the gains are usually taxed. The tool above compares the two on your numbers; the gap is the price of certainty.
Two things the arithmetic misses: an employer match on a retirement contribution usually beats both, and an emergency fund comes before either, because the alternative to having one is borrowing at card rates.
Quick answers
How much does paying $100 extra a month save?
It depends on the rate and the time left. On a $240,000 balance at 6.25% with 25 years to run, $100 a month takes three years and two months off and saves about $35,000 in interest. The table above prices it for your loan.
Is it better to pay extra monthly or once a year?
Monthly is slightly better because the principal falls sooner, but the difference is small. What matters far more is the total amount you put in.
Do biweekly payments really work?
Yes, because 26 half-payments equal 13 monthly payments a year. Do not pay a company to set it up; you can add a twelfth of a payment each month yourself.
Will extra payments lower my monthly payment?
No. They shorten the loan instead. If you want a lower payment, ask your servicer about recasting after a lump sum, which re-spreads the smaller balance over the remaining term.
Should I pay off my loan early or invest?
Paying down the loan is a guaranteed return equal to the rate. Investing might beat it, but it is not guaranteed and gains are usually taxed. The comparison above uses your own numbers.
Sources
- CFPB, how a payment is applied, and instructing the servicer to put extra towards principal
- 12 CFR § 1026.36(c), prompt crediting of payments
- CFPB, prepayment penalties
- Fannie Mae, what a recast loan is
- CFPB action over a paid biweekly payment programme (2015)
- CFPB, escrow and biweekly payment definitions