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Why an extra $200/month in year 1 saves more than $200/month in year 25

5 min read #mortgage #amortisation #compound interest

A friend asked me last week: “If I’m going to throw $200/month at extra principal, does it matter when I start? I’ll pay the loan off either way.”

The intuitive answer is “no, money is money.” The mathematical answer is “yes — by a factor of roughly 6× on a 30-year loan.”

Here’s the version with numbers, on a vanilla $400,000 / 30-year / 6.5% loan.

The setup

Baseline: $2,528/month. Total interest over 30 years: ~$510,000.

Now imagine three scenarios:

  1. Pay an extra $200/month for years 1–10, then stop and pay the minimum afterward.
  2. Pay the minimum for years 1–20, then add $200/month for years 21–30.
  3. Pay an extra $200/month every single month for the life of the loan.

You’d guess scenarios 1 and 2 are similar — same extra dollars, just shifted.

The actual numbers

ScenarioExtra principal paid totalTotal interestvs. baseline
Baseline (no extras)$0$510,000—
Extra $200 in years 1–10 only$24,000~$432,000−$78,000 interest
Extra $200 in years 21–30 only$24,000~$497,000−$13,000 interest
Extra $200 every month$70,000$391,000−$119,000 interest

The first 10 years of extra payments saved $78,000 in interest. The last 10 years of equivalent extra payments saved $13,000. 6× difference for the same $24,000 of extra dollars.

Why?

Each extra dollar of principal you pay today eliminates the future interest on that dollar for the remaining life of the loan. Pay a dollar in month 1 of a 30-year loan and you avoid 359 months of interest on it. Pay a dollar in month 350 and you avoid 10 months of interest on it.

Mathematically, an extra dollar in month m saves approximately:

saving ≈ ($1 × monthly_rate × (n − m))

…where n is the original term in months. This is a rough approximation (it ignores the fact that the saved interest itself compounds), but the shape is right: the saving is roughly linear in how many months are left.

In month 1 of a 360-month loan: 359 months remaining. In month 350: 10 months remaining. 35.9× different.

What this means in practice

If you have a windfall — bonus, tax refund, inheritance — the highest return on principal you’ll ever get is in the first few years of a long mortgage. At a 6.5% rate, that “investment” yields approximately 6.5% risk-free, tax-free (no capital gains; you’re just not paying interest).

That beats most low-risk savings options. It doesn’t beat the long-run expected return of the stock market (~7% real), so the standard advice applies: max your retirement accounts first. But for cash you’d otherwise sit in a savings account, killing mortgage principal early is usually the right call.

What changes the calculus

This logic flips in three cases:

  1. Low-rate mortgage (sub-4%). At rates that low, the “guaranteed return” from prepaying isn’t competitive with even very conservative investments. Many people locked at 3% in 2020–21; for them, extra principal is suboptimal.

  2. Adjustable-rate or balloon loans. The math above assumes a fixed rate for the full term. ARMs change the variable mid-stream.

  3. You’d lose tax deductions you’re actually taking. If you itemize and the mortgage interest deduction matters, prepaying reduces it. For most people who take the standard deduction post-2017, this isn’t a real factor.

Try it yourself

The mortgage calculator lets you plug in any loan and toggle the “extra principal” field. Compare your specific scenario:

The answer for your loan is what matters. The general rule — early extra principal beats late extra principal — is a starting point, not a prescription.