How to Take Control of Your Interest Rate
You cannot change your mortgage rate without refinancing. But you can change what your loan really costs. Paying extra toward principal makes your loan act like a loan with a lower rate. See how much, or find the extra payment that gets you where you want to be. Results update as you type.
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The effective rate is not a real rate on your loan. It is the rate a standard loan would need to charge to cost the same total interest. This assumes a fixed rate and that you make the extra payment every month. Most mortgages let you pay extra without a penalty, but check yours, and ask your lender or servicer to apply the extra to principal.
What is an effective interest rate?
Your mortgage has a set interest rate, and you cannot change it without refinancing. But what matters is how much interest you actually pay. When you pay extra toward principal, you owe interest on a smaller balance every month after that, so your total interest drops. The effective rate translates that savings into a rate you can compare: it is the rate a standard loan, paid on schedule with no extra payments, would need to charge to cost the same total interest.
For example, a 6.5% loan with a steady extra payment can cost about as much in interest as a standard loan at a rate a point or more lower. You did not refinance, and you paid no closing costs. You simply paid the loan down faster.
Ways to find extra money for principal
- Round up your payment. Adding even $50 to each payment adds up over many years.
- Make one extra payment a year. Dividing it into monthly amounts works the same way.
- Put windfalls to work. A bonus, tax refund, or raise can go toward the loan in one payment or a higher monthly amount.
- Pay off other debt first, then redirect the payment. When a car loan or credit card is paid off, send that same payment to your mortgage.
Before you pay extra
- Keep an emergency fund. Money put into your home is harder to get back out than cash.
- Pay off higher-rate debt, like credit cards, before sending extra to a lower-rate mortgage.
- Check whether your loan has a prepayment penalty, and tell your servicer to apply extra money to principal.
- Compare it with other uses of the money, such as retirement savings. The right choice depends on your situation.
Thinking about borrowing against your home instead? See which way fits you, or compare a refinance with a second mortgage. To see how much equity you have, use the equity calculator.