Loan Prepayment Calculator
See what a lump-sum prepayment actually saves you — and, more importantly, which of the two payoff options your lender offers is worth several times more than the other.
- Updated Aug 17, 2026
- Reviewed by the BSF CPA Editorial Team
- US loans & mortgages
- 9 min read
The same prepayment is worth about four times more if you shorten the term instead of lowering the payment. Put $25,000 against a $350,000 mortgage at 6.65% with 30 years left: keep the payment and you finish 5 years 7 months early, saving $125,541 in interest. Take the lower payment instead and you save only $32,777. Identical money, $92,764 difference.
Enter your current balance, rate, years remaining and the lump sum you plan to pay, then choose which option your lender is offering.
Every prepayment on a long-term loan kills future interest. But where you apply it matters: a $20,000 prepayment in year 2 of a 30-year mortgage saves dramatically more than the same prepayment in year 25. This calculator quantifies the savings — and helps you choose between reducing the term (max savings) or reducing the payment (cash-flow relief).
Loan Prepayment Calculator
See how much interest you save by prepaying — and whether to reduce the term or the payment.
Prepayment Savings
How to read your results
| Output | What it means | Why it matters |
|---|---|---|
| Interest saved | Interest avoided versus not prepaying at all | The headline benefit, and it swings hugely on which option you pick. |
| Original payment | Your monthly payment before prepaying | The baseline. |
| New payment | Payment after the prepayment | Unchanged if you shorten the term; lower if you reduce the payment. |
| Original term | Years and months remaining today | What you entered. |
| New term | When you actually finish | Shortens if you keep the payment; unchanged if you cut it. |
The rate field moves in 0.05 steps. If your rate is 6.67%, the field will snap to 6.65% — the closest available. The effect on the result is small but it is not exact, so read the figure as an estimate.
This models one lump sum paid now, not a recurring monthly overpayment. For regular extra payments, see the note in the FAQ.
What a prepayment actually does
Interest accrues on the outstanding balance. A prepayment goes entirely against principal, so it removes not just that amount but every future month of interest that balance would have generated. The earlier in the loan you do it, the more months of interest you cancel — which is why the same dollar is worth far more in year two than in year twenty.
That is also why the saving looks disproportionate. On the mortgage example below, $25,000 prevents $125,541 of interest. You are not earning five times your money; you are cancelling 30 years of compounding on that slice of principal.
The two options — and why one wins
After a prepayment, lenders generally offer a choice. Both use exactly the same money, and they are not close in value.
Reduce the term
Keep paying the same amount each month. The balance clears sooner and you skip years of payments entirely.
Reduce the payment
Keep the original end date and pay less each month. Immediate cash-flow relief, far less interest saved.
| Prepayment | Reduce term — saved | Reduce payment — saved | Term option is worth |
|---|---|---|---|
| $5,000 | $28,703 | $6,555 | 4.4× |
| $10,000 | $57,406 | $13,111 | 4.4× |
| $25,000 | $125,541 | $32,777 | 3.8× |
| $50,000 | $210,638 | $65,554 | 3.2× |
| $100,000 | $317,919 | $131,107 | 2.4× |
$350,000 balance at 6.65% with 30 years remaining.
Reducing the payment keeps you in the loan for the full original term, so you carry a balance — and pay interest on it — for all 30 years. Reducing the term cancels the final years outright, and those are the years where you would still be paying interest on a balance that has barely moved.
Choose the lower payment only if you genuinely need the monthly cash flow. If you can carry the current payment, the term option is worth two to four times as much.
The formula
payment = balance × i × (1 + i)n ÷ [(1 + i)n − 1]
new balance = balance − prepayment
Reduce term: months = −ln(1 − i × new balance ÷ payment) ÷ ln(1 + i)
Reduce payment: new payment = new balance × i × (1 + i)n ÷ [(1 + i)n − 1]
interest saved = (old payment × n − balance) − (new interest)
- i Monthly rate — annual rate divided by 12.
- n Months remaining, from the years field.
- months Rounded up to a whole month, so the final payment is treated as a full one.
Three worked examples
$350,000 balance, 6.65%, 30 years left, $25,000 prepayment
Payment stays at $2,247. The term falls from 30 years to 24 years 5 months — five years and seven months of payments removed, worth about $150,500 in payments you never make. Interest saved: $125,541.
Identical inputs, "reduce payment" selected
The payment drops from $2,247 to $2,086 — $161 a month back in your pocket, $57,960 over the full term. But you still finish in 30 years, and interest saved is only $32,777. The choice between the two options is worth $92,764.
$25,000 balance, 12.40%, 5 years left, $5,000 prepayment
Payment stays at $561, the term drops from 5 years to 3 years 9 months, and interest saved is $3,418 — a 68% return on the $5,000, realised over less than four years and completely risk-free. Short high-rate loans repay prepayment faster than long cheap ones in percentage terms, even though the dollar totals are smaller.
How much to prepay
Savings scale almost linearly with the amount, so there is no threshold you need to reach before it is "worth it". On the mortgage example, every $5,000 removes roughly 15 months and about $28,700 of interest:
| Prepayment | New term | Years saved | Interest saved | Saved per $1 paid |
|---|---|---|---|---|
| $5,000 | 28y 9m | 1y 3m | $28,703 | $5.74 |
| $10,000 | 27y 6m | 2y 6m | $57,406 | $5.74 |
| $25,000 | 24y 5m | 5y 7m | $125,541 | $5.02 |
| $50,000 | 20y 4m | 9y 8m | $210,638 | $4.21 |
| $100,000 | 14y 6m | 15y 6m | $317,919 | $3.18 |
The return per dollar declines as the amount rises, because larger prepayments remove the cheapest, latest years first. A modest early prepayment is remarkably efficient — the first $5,000 works harder than the hundred-thousandth.
Prepaying as an investment
A prepayment earns a guaranteed, tax-free return equal to your interest rate. Nothing else in personal finance offers a certain return at that level, so the higher your rate, the stronger the case:
| Rate | Payment | New term | Interest saved on $25,000 |
|---|---|---|---|
| 5.65% | $2,020 | 25y 2m | $92,179 |
| 6.65% | $2,247 | 24y 5m | $125,541 |
| 7.65% | $2,483 | 23y 7m | $166,214 |
Two percentage points of rate nearly doubles what the same $25,000 saves. It also follows that time remaining matters enormously: on the same balance and rate, $25,000 saves $125,541 with 30 years left, $59,496 with 20 years, and $36,556 with 15.
When not to prepay
You have higher-rate debt
Clear credit cards and personal loans first. Prepaying a 6.65% mortgage while carrying a 22% card balance loses money every month.
You have no emergency fund
Money in a mortgage is hard to retrieve. Three to six months of expenses in cash comes first — a prepayment cannot be withdrawn when the roof leaks.
You are missing an employer match
A 50% or 100% match on retirement contributions beats any mortgage rate immediately. Take the free money first.
Your rate is very low
Against a 3% loan, the guaranteed 3% return is easy to beat elsewhere over a long horizon. Against 6.65%, that argument is much weaker.
Common mistakes
Taking the lower payment by default
Lenders often present it first. It is worth two to four times less. Ask explicitly to keep the payment and shorten the term.
Not specifying "apply to principal"
Unmarked extra money may be held as a prepaid future instalment rather than reducing principal — which saves nothing. Put it in writing.
Ignoring prepayment penalties
Rare on US mortgages but real on some loans, and common on precomputed-interest consumer loans. Check before paying.
Waiting to accumulate a big sum
Every month you wait, the loan accrues interest. Smaller amounts applied sooner beat a larger amount applied later.
Emptying savings to do it
Home equity is illiquid. Keep the emergency fund intact; a prepayment you have to reverse with a credit card is a bad trade.
Assuming re-amortization is automatic
Many servicers require a written request and charge a fee to recast. Keeping the payment and shortening the term usually needs no recast at all.
Best practices
Keep the payment, shorten the term
Unless you need the cash flow, this is worth $92,764 more on Example 1's numbers. It is the single highest-value decision on this page.
Prepay early in the loan
The benefit falls as the remaining term shrinks — $125,541 with 30 years left against $36,556 with 15. Sooner is materially better.
Clear the highest rate first
The guaranteed return equals the rate, so a 12.40% loan repays prepayment twice as fast as a 6.65% one.
Get the application confirmed in writing
After paying, check the next statement shows a reduced principal balance and, if you chose it, a shorter remaining term.
Frequently asked questions
Should I reduce my term or my payment?
Reduce the term if you can carry the current payment — it saves two to four times more. On a $350,000 loan at 6.65% with 30 years left, a $25,000 prepayment saves $125,541 by shortening the term but only $32,777 by lowering the payment.
Does this handle regular monthly overpayments?
No — it models a single lump sum paid now. Recurring extra payments save more than one lump of the same total, because each instalment starts working immediately. Treat this as a conservative estimate for that case.
Why does the rate field jump in 0.05 steps?
The input is set to increments of 0.05, so 6.67% becomes 6.65%. The difference in the result is small — a few dollars a month — but the output is an estimate rather than an exact match to your statement.
Are there prepayment penalties?
Most US mortgages written today have none, and federal rules sharply limit them on qualified mortgages. They still appear on some commercial, auto and older loans, and precomputed-interest consumer loans limit the benefit. Check your note first.
Is prepaying better than investing?
It is a guaranteed, tax-free return equal to your rate. Markets may return more over long horizons but not with certainty. At 6.65% the guaranteed return is competitive; at 3% it is much easier to beat elsewhere.
Will prepaying hurt my credit score?
No. Reducing a balance generally helps or is neutral. Fully closing an old instalment account can slightly shorten average account age, but the effect is small and short-lived.
What about the mortgage interest deduction?
It reduces the effective cost of the interest only if you itemise. Most filers take the standard deduction and get no benefit, in which case the full rate is your real cost. Speak to a tax professional about your situation.
What is recasting?
Recasting re-amortizes the loan over the remaining term after a large prepayment, lowering the payment while keeping the rate. That is the "reduce payment" option here. Servicers usually charge a fee and require a written request.
How do I make sure it goes to principal?
State "apply to principal" in writing with the payment. Otherwise some servicers treat extra money as an early payment of next month's instalment, which saves no interest at all. Confirm on the following statement.
Does prepaying reduce my escrow payment?
No. Property taxes and insurance are unrelated to the loan balance, so the escrow portion is unchanged. Only the principal and interest portion is affected.
Is it too late to prepay near the end of a loan?
The benefit is much smaller. By then most of each payment is already principal, so there is little interest left to cancel — $36,556 saved with 15 years remaining against $125,541 with 30, on the same balance and prepayment.
Should I prepay or refinance?
They solve different problems. Refinancing lowers the rate on the whole balance; prepaying removes principal at the existing rate. If current rates are meaningfully below yours, price a refinance first, then prepay the new loan.
Methodology & sources
Payments use the standard fixed-rate amortization formula with monthly compounding and end-of-month payments. The prepayment is applied immediately to principal. In term-reduction mode the payment is held constant and the remaining months solved logarithmically, rounded up to a whole month; in payment-reduction mode the balance is re-amortized over the original remaining term. Interest saved compares total interest with and without the prepayment. Prepayment penalties, fees and escrow are excluded. The rate input accepts 0.05 increments.
- Consumer Financial Protection Bureau — prepayment penalty rules for qualified mortgages, Regulation Z.
- Standard loan amortization mathematics; all figures independently verified against the live tool.
- Freddie Mac Primary Mortgage Market Survey — reference rates, August 2026.
Related resources
- Mortgage Payment CalculatorThe payment you are prepaying against
- Personal Loan CalculatorHigher-rate debt to clear first
- Refinance Break-EvenPrepay or refinance?
- Pay Off Debt or InvestWhere the next dollar should go
- Loan Eligibility CalculatorHow clearing debt restores borrowing power
- All CalculatorsThe full BSF library
Ask for the right option, in writing
Before you send the money, confirm two things with your servicer: that it applies to principal, and that your term shortens rather than your payment falling.
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