Extra Payments: The Cheapest Return You Will Ever Lock In
Prepaying a loan is one of the few investments whose return is guaranteed, known in advance, and equal to the loan's interest rate itself. This guide runs the standard strategies on one fixed example — a $400,000, 30-year mortgage at 6.5%.
How One Extra Payment a Year Kills a 30-Year Mortgage
The baseline: a $400,000 loan at 6.5% for 30 years costs $2,528.27 a month for 360 payments — $906,178 total, of which $510,178 is interest, more than the loan itself.
Add a thirteenth payment — one full payment extra toward principal, once a year. The loan retires at payment 292 instead of 360: 68 months (5.7 years) sooner, total interest $398,199. That is $111,979 saved for an 8.3% bump in annual outlay; every prepaid dollar stops accruing 6.5% for the rest of the loan's life.
Timing matters slightly. The same money as $210.69 extra every month finishes at payment 290: $116,342 saved — $4,363 better, because the dollars arrive earlier. The computed ladder: $100/mo saves $63,917 and ends the loan 3.2 years early; $500/mo saves $205,557 and shortens it 10.6 years.
Extra Payments vs Investing: How to Decide Honestly
The guaranteed side: prepaying $210.69 monthly avoids $116,342 of interest. Each prepaid dollar earns exactly the loan rate, compounded, tax-free on arrival — economically, a bond yielding your mortgage rate.
The market side: the same stream invested grows to $147,430 at a 6.5% return (identical economics), $185,459 at 8%, and $255,274 at 10% — $226,148 after 15% capital-gains tax — assuming you stay invested the full ~24-year payoff horizon.
Break-evens decide it. Prepaying at 6.5% beats an untaxed investment averaging under 7.7%; after capital-gains tax the hurdle is about 8.4%. In a 24% tax bracket the prepaid mortgage is worth a taxable 8.55% yield (9.56% at 32%), since a bond's coupon is taxed and interest avoided is not. Practical rule: capture the employer match first, clear any debt above roughly 8%, then choose by temperament — if you would not borrow at 6.5% to buy stocks, prepaying is that trade in reverse.
The Biweekly Payment Trick: What Actually Happens
Half the payment every two weeks makes 26 half-payments a year — 13 full payments where the schedule expects 12. The extra payment hides in the calendar. Computed: a true biweekly schedule retires this loan in 628 half-payments — 24.2 years — with $392,682 of interest, saving about $117,500 and 5.8 years.
The DIY equivalent — adding a twelfth of the payment to each monthly payment — lands at $393,836, within $1,154 of biweekly; the small gap is per-period interest accrual on some notes. That near-identical result is why third-party biweekly services ($300–500 setup, $2–5 per transfer) are hard to defend: set the recurring extra up yourself and keep the fee.
Snowball vs Avalanche: The Actual Finish Line
Snowball pays the smallest balance first; avalanche the highest rate. Both, on four debts with a $900 budget (minimums $740): a $1,500 store card at 28.99%, a $6,000 card at 22.99%, a $9,000 card at 18.99%, a $12,000 car loan at 7.5%.
Here the smallest balance carries the highest rate, so both pick the same order and finish identically: 28 months, $4,952 interest. Move the 29.99% rate onto the $9,000 card and they diverge: avalanche finishes in 45 months, $11,197; snowball — clearing the small cards first, the big card last — needs 47 months, $13,138. Avalanche saves $1,941 and two months on identical cash. Calibration: minimums-only runs 57 months and $13,054 — budget size beats ordering.
The data: avalanche never loses; snowball's edge is behavioral — closed accounts sooner sustain motivation. Which plan you will actually complete matters more than a $1,941 spread across years.
Recast vs Prepay: When the Bank's Option Matters
A recast applies a lump sum to principal and re-amortizes over the same payoff date at the same rate: smaller required payment, unchanged term, no credit check, fee usually $150–500.
At year 5, balance $374,444, inject $50,000. Recast: payment drops from $2,528.27 to $2,190.67; remaining interest from $384,038 to $332,757 — $51,281 saved, same payoff date. Prepay the same $50,000 keeping the original payment: remaining interest $231,460, payoff 6.7 years early — $152,577 saved. The recast leaves about $101,300 on the table because it converts your lump sum into a lower payment instead of a shorter tail.
What the product sells is cash flow — years of $337.60 monthly relief for an income stretch or a fixed retirement budget, rational if those payments earn more than 6.5%. The free hybrid: recast, then voluntarily keep paying the old amount — prepay math with a lower obligation left in the contract.