Mortgage Payoff Strategies: The Math Behind Early Repayment
On a 30-year loan, the interest can exceed the principal. Here are the strategies I use to pay it off faster, ranked by impact. A mortgage is the largest debt most people carry, and the interest over a 30-year term can exceed the original loan amount. When I bought my first home, the amortization schedule shocked me. On a 300,000 dollar loan at 6 percent, I would pay nearly 347,000 dollars in interest over 30 years. That motivated me to learn every strategy for paying the loan off faster. Here is the math behind the most common approaches, ranked by impact, with the caveats I have learned the hard way. Extra Principal Payments: The Highest-Impact Move Adding extra to each monthly payment and directing it to principal is the simplest and most effective strategy. Because amortization front-loads interest, extra principal early in the loan has an outsized effect. Every dollar of principal paid early eliminates all future interest that would have accrued on that dollar. On a 300,000 dollar loan at 6 percent for 30 years, the monthly payment is about 1,798 dollars. Adding 200 dollars per month to principal from the start reduces the term from 30 years to about 24 years and saves roughly 78,000 dollars in interest. That is a return on the extra 200 per month that no safe investment can match.