When you pay a mortgage earlier than expected, that's prepayment. Mortgages can be prepaid "fully" or "partially." When a homeowner refinances, a new mortgage "fully" pays off the old mortgage and starts a new series of payments. Partial prepayment is the addition of extra payments to mortgage principal. Let's level set on the three fundamentals of partial prepayment.

Home equity is the difference between the home price and the mortgage balance. Adding an extra payment decreases the mortgage balance and simultaneously increases equity. For example, a $25,000 prepayment to principal (green) in month 50 decreases the loan balance (purple) by $25,000 immediately.

Prepayment starts a cascade of savings because mortgages accrue simple interest every month. The simple interest formula is "principal x rate x time." For a $500k loan, the first interest payment is $2,500 ($500k x 6% x 1/12). Interest gradually decreases over time. If the loan balance is lowered by $25k in month 50, the simple interest due for month 51 is $125 lower ($25k x 6% x 1/12). Since the minimum monthly payment is fixed, $125 does not materialize as cash savings and is applied to principal in the following month. Interest savings in month 52 are $125.625 ($25,125 x 6% x 1/12). This cascading effect continues for a total savings of ~$82,000!

Prepayments reduce the principal balance and "kill" the loan faster than 30yrs. In the example above, a single $25k contribution in month 50 ends the oan ends in ~27yrs or 325 months exactly. Monthly savings of $125 start in month 51 and end in month 325 for a total of $34k (275 x $125). However, the total savings are $82k. The additional $48k ($82k - $34k) of savings are from compounding.