When is the best time to make a lump sum payment?
The earlier in the loan, the more you save. A $10,000 lump sum in month 1 of a 30-year mortgage saves significantly more than $10,000 in year 20, because the year-1 reduction eliminates interest that would have compounded across 29 remaining years. However, any time is better than never. Tax refunds, bonuses, inheritance, or asset sales are common sources for lump sum payments — apply them immediately rather than letting the money sit in a low-yield account.
How do I make sure extra payments go to principal?
Most mortgage servicers don't automatically apply extra to principal. You must specify: include a note with the payment ('Apply extra to principal only'), use the servicer's online portal principal payment option if available, or call to confirm their process. Incorrect application is one of the most common servicing complaints. After making an extra payment, check your next statement — the new balance should reflect the full principal reduction. If it shows the payment was applied to next month's regular payment instead, contact your servicer.
Extra payments vs investing — which is better?
The comparison: paying down a 6.75% mortgage is a guaranteed 6.75% after-tax return. Investing in the stock market averages ~7-10% pre-tax historically, but with volatility and no guarantee. The math slightly favors investing in equities long-term, but with much more risk. A balanced approach: pay enough extra to stay on track, invest the rest. Your mortgage interest deduction (if you itemize) also affects the after-tax rate on mortgage paydown. Many advisors suggest prioritizing high-rate debt (credit cards, personal loans) before aggressively paying down low-rate mortgages.
Does making extra payments affect my required monthly payment?
No — for most standard mortgages and loans, your required monthly payment stays the same regardless of extra payments. Extra payments reduce your balance and shorten your payoff timeline, but they don't lower next month's required payment. This is why you can build a financial buffer — make extra payments in good months, and you're still only required to make the standard payment in tight months. Exception: some adjustable-rate loans and certain private loans may recalculate payments when principal drops significantly.
What are the best sources of extra payment money?
Annual tax refund: average US refund is ~$3,100 — applied as a lump sum each year, this alone can save years off a mortgage. Annual bonus: direct to principal. Refinancing savings: if you refinance and lower your payment, continue paying the old amount. Side income: earmark specific income streams for loan paydown. The bi-weekly payment trick: same math as paying 1 extra monthly payment per year. Raise or income increase: keep lifestyle flat, direct the increase to principal. Selling assets: pay down high-rate debt first.