Cost over time

Each month, interest is calculated on the balance you still owe: balance times the rate, divided by 12. Whatever is left of your principal and interest payment goes to principal.

At the start the balance is at its largest, so interest takes most of the payment. As the balance shrinks, interest takes less and principal takes more, even though the payment stays the same. This schedule is called amortization.

It also explains why extra principal paid early saves the most: it removes balance that would have collected interest for years.

Cost over 3, 5, 7 and 10 years shows how the answer shifts with time. Pick the horizon that fits your plans: a likely job move, a growing family, a plan to keep the place as a rental. If you expect to sell or refinance within a few years, that shortens the horizon too.

Over short horizons, low closing costs tend to win. Over long ones, the lower rate does. When two options trade places between year 3 and year 10, the crossover year is the number to consider.

An extra payment marked for principal lowers your balance right away, so every later payment carries less interest. On most fixed-rate loans it shortens the loan rather than lowering the required payment.

Paying extra early saves the most, because that principal would otherwise have collected interest for decades. Check page 1 of your Loan Estimate to confirm there is no prepayment penalty.

Money paid into the house is difficult to access without selling or borrowing, so weigh it against keeping cash on hand.