Dear Dr. Don,
When making extra principal-only mortgage payments on a conventional fixed rate 30-year mortgage -- is it better to make an additional principal payment every month, or can we make one lump-sum payment each year? I'd like to put an extra $200 per month down but it would be easier to do two $1,200 payments per year, on Jan. 1 and June 1.
-- Richard Redouble

Dear Richard,
The interest savings comes from reducing the outstanding loan balance. It doesn't make much difference which approach you take because with either one you're reducing your loan balance by an extra $2,400 each year.

Bankrate's Mortgage payment calculator doesn't allow for biannual payments, but it will let you compare between making additional principal payments monthly or annually. I don't know the specifics of your mortgage, but the table below illustrates an example of the two approaches:

Monthly vs. annual payments

30-year fixed 30-year fixed with monthly additional principal 30-year fixed with annual additional principal Outstanding loan balance $200,000 $200,000 $200,000 Interest rate 6.28% 6.28% 6.28% Original loan term (months) 360 360 360 Monthly payment $1,235.34 $1,235.34 $1,235.34 Additional monthly principal - $200 - Additional annual principal - - $2,400 Adjusted loan term (months) 360 251 250 Total interest expense $244,722 $159,247 $158,455 Difference:   $85,475 $86,267

As you can see, the total interest expense between annual and monthly additional principal payments is minimal. The timing of the annual payment will influence the model. I assumed February payments. This example doesn't consider any tax impact from a loss in the mortgage interest deduction on your taxes.

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