Lump sum in year 1 wins
Lump sum vs. regular extra payments: which wins?
A single $5,000 lump sum applied to a 30-year mortgage in year 1 saves roughly the same total interest as $50/month extra over the entire loan, but the lump sum requires no behavioural change. Lump sums are ideal for tax refunds, bonuses, and inheritances. Regular extra payments build a habit and benefit from compounding savings.
Level
Key takeaways
04 · ideas- A $5,000 lump sum in year 1 saves more interest than $100/month for 4 years
- The 'return on prepayment' is always exactly your mortgage rate — equivalent to your loan rate
- Windfalls above 6-month emergency fund are almost often more effective when deployed against high-rate debt
- The psychological benefit of seeing the loan shrink accelerates commitment
Two strategies for using extra money to pay down a loan:
Strategy A: Regular extra payments ($200/month extra, every month)
Strategy B: Lump sum payments (invest $2,400/year in a savings account, then make one payment)
Are these equivalent? Not quite. Strategy A wins — paying earlier means less interest accumulates.
Example: $200,000 mortgage at 6%, 30 years
Strategy A ($200 extra/month):- Saves $73,000 in interest
- Pays off 8 years early
- Saves ~$67,000 (depending on exact timing)
- About 6% less efficient
The difference: money in your savings account while waiting earns less than you'd save by immediately reducing the mortgage principal.
Key insight: For debt above the savings account interest rate, pay immediately — don't hold for a "big payment" later.