# Pay extra principal in lump sum to save

Dear Dr. Don,
I’m trying to pay extra on principal to reduce the length of my loan repayment and am wondering which approach I should take.

On a 30-year fixed-rate loan, is it best to give a once-per-year additional payment of \$1,200 or 12 additional monthly payments of \$100 each?

George Grapple

Dear George,
It won’t be a huge difference over the life of the loan, but making a once-a-year additional principal payment of \$1,200 — especially if the payment is made in the beginning of the year — will shorten the loan more than monthly payments of \$100.

That’s because the loan balance is reduced in one fell swoop. The remaining mortgage payments will have less interest due while more of the contractual mortgage payment will go toward repayment of principal.

Using Bankrate’s
mortgage payment calculator, I’ve constructed an example that illustrates the difference between the two approaches.

 None Annually Monthly Loan amount \$200,000 \$200,000 \$200,000 Interest rate 6.5% 6.5% 6.5% Original loan term (months) 360 360 360 Loan payment \$1,264.14 \$1,264.14 \$1,264.14 Additional principal payment 0 \$1,200 \$100 Adjusted loan term (months) 360 291 293 Total payments \$455,089 \$397,013 \$399,143 Total interest expense \$255,089 \$197,013 \$199,143
Difference vs. conventional:
 None Annually Monthly Interest expense reduction \$58,076 \$55,946 Loan term reduction in years 5.75 5.58

So, the difference between the two approaches is a couple of months in loan length and a couple of thousand dollars in interest expense.

It’s important to remember that although you’ll save money overall by paying down your mortgage and reducing your principal balance,
your monthly payment will not decrease.

I think the difference between the two approaches you mentioned is small enough that you can choose which approach is easier for you to manage in your household spending plan.

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