Every extra dollar you pay toward mortgage principal skips all the future interest that dollar would have accrued. That's a guaranteed return at your mortgage rate, with no market risk. At 7% mortgage rates, that's a hard deal to beat.
The worked example
$400,000 loan, 30-year fixed, 7% interest.
Standard monthly P&I: $2,661. Total interest over 30 years: ~$558,000.
Now add an extra $200/month to principal, starting month 1:
- Loan paid off in ~24.5 years instead of 30.
- Total interest: ~$448,000.
- Interest saved: ~$110,000.
- Total extra payments: $200 × 294 months = $58,800.
- Net benefit: ~$51,000, plus 5+ years of freedom from the payment.
The compounding reason
Each $1 of principal you pay off saves you all future interest that would have accrued on it. An extra $1 in month 1 of a 30-year 7% loan saves $6.72 in future interest. The earlier in the loan, the bigger the effect — because more interest-years are in the future.
The opportunity-cost argument
"I could invest that $200 in index funds instead". True — but compare apples to apples. Extra principal gives you a risk-free, tax-free return at your mortgage rate. Historical stock returns (~7% real over long periods) are pretax and volatile. At 7% mortgage rates, the paths are roughly tied. At 4% rates, stocks tend to win.
When not to
Pay off higher-interest debt first (credit cards at 20%+ destroy any mortgage prepayment return). Build an emergency fund (3–6 months expenses). Max the 401(k) match. Then consider extra principal.
Mortgage Calculator includes an extra-principal slider. See years saved + interest saved live.