How Do Principal Payments Work on a Home Mortgage?

megan is with us in Bakersfield California hi Megan how are you I'm gonna reel better than I deserve how can I help um okay so well I just have like a pretty weird personality so I might get all crazy here but we're on the tail end of baby step two we only have like 36 hundred dollars to pay off one bill and my husband is finishing the last of his prerequisites to start nursing school and we plan on just bankrolling that the whole way through with help from parents and we don't want to take out loans good so I am more of like a future planner like I don't like to thank just like where we're going to be in five years like I'm thinking more about the mortgage when my husband graduates because a lot of a much larger income and I have heard a lot about like prepaid interest or prepaid principal and they don't really understand how that works like I was watching the pill method and then he was talking about taking out loans and I was like this guy's a nut so I'm listening to it but that's kind of where I was at was how do you principal payments work yeah it makes it sound like there's some kind of a magic to it it there's no magic to it at all you take the interest rate of your mortgage and you multiply it R divided by 12 okay and you multiply that times the outstanding balance that month that is the interest charged that month does that make sense mm-hmm and the rest of your payment goes towards principle and so let's just make up some easy numbers let's say 6% interest rate which would be very well issues 3% interest rate okay that's current that's a quarter of a percent 0.25 per month if you divide 3 percent by 12 okay you'll get a quarter of a percent per month and then so if you had a hundred thousand dollar loan just to make the numbers real round just because it's a good it's a good lesson to walk through you'd say 0.025 is your oops I did that is 0.025 still not doing that right a hundred thousand but to me things in calculator one time point zero to five there we go okay there we go 250 bucks I should be able do that my head alright anyway $250 of your payment that month if you have a hundred thousand dollar balance at three percent would go towards interest right okay now let's say your payment was three hundred and fifty dollars it wouldn't be let's say it's four hundred and fifty dollars okay okay and then so 250 went to interest the other two hundred dollars would pay the $100,000 does that make sense yeah the next month your interest is calculated on ninety eight thousand eight hundred dollars at a quarter and so instead of being two hundred fifty dollars I make up a number let's say it's two hundred forty seven dollars okay but your name your payment is still four hundred dollars but a little bit less went to interest so a little bit more goes to principal so instead of paying two hundred dollars towards principal the next month in our example it might be two hundred and three dollars you follow me okay so every time you pay principal that makes your next payment more of it go towards principal less towards interest so it's like say for example I was gifted a thousand dollars for I don't know just being amazing and somebody and we went and put that on the principal yes would that change our payment the next month no or what he meant stays the same it changes the amount of interest would go down because you're going to be charged interest on a thousand dollars less you're not paying interest on that thousand dollars anymore okay and so it would cause your your payment would stay exactly the same but more of your payment would go towards principal oh okay you don't have as high an interest charge because you don't have as high up balance your interest is calculated on the balance each month you pay your interest rate only on what's outstanding so if you throw 10,000 bucks at a mortgage you don't pay interest the next month on that $10,000 oh it saves you the interest on that $10,000 your payment stays the same so a lot more of your payment would then go towards principle the following month than it did before so that's why sometimes people say oh you know I don't wanna I've already paid all the interest so I don't want to pay my mortgage off because I don't have already paid all the interest upfront no you didn't you only pay interest on what's outstanding and once you've paid on the mortgage for years and years and years and you paid the principal down your payment is still the same much much more of your payment goes towards principle after 15 years in a 30-year mortgage then at the 28th year of a 30-year mortgage exactly okay yeah this is the kind of stuff that they should teach in high school because nobody taught me this yeah that's exactly right well good news is 36% of the high schools in America now carry a Dave Ramsey high school curriculum called foundations and personal finance so we've got a little over a third of them but we got the other two-thirds to go so but you're exactly right that's called a simple interest calculation that I just walk through with you but that's how any mortgage is calculated have you ever seen the tables printed out on a mortgage payment where it shows the columns and shows your payment and shows how much is going to interest how much is going to principal and you slide your finger down you're down the page you're like wow a whole lot more after paying you know 120 payments paying 10 years a whole lot more of its going towards principal than interest you follow me yeah if you've ever seen that so what happens is if you want to do this easy without having to do the raw math if you pay $10,000 on your balance you just slide your finger down the outstanding balance and your own payment number 37 when you did it then you pay $10,000 then you're going to drop down it might be looking more like payment number 61 is going to be your next payment you're just knocking out chunks of payments it's going to be calculated like payments t1 whatever wherever the balance is closest to the new balance after you paid your 10,000 bucks down it's an item that really helps a lot I was super worried about it because I really want to get it paid off within like 10 years after he graduates yeah that's why throwing money at the mortgage early and often when you get to baby step six is so important if you but it's also why you don't need to do more than once a month because they only recalculate once a month the payments are monthly payments and so if you send for payments in a month it doesn't change the math at all now they all go towards principle but you might as well just send one check and so I've seen these groups with these supposed systems that they've gotten all this BS where you just start sending payments and you don't want it you want to send one a week and now it doesn't work because the calculation is done once a month it is 1/12 of the interest the annual interest rate per month it is not a daily or a weekly calculation on mortgages now some credit cards are calculated daily and some are calculated twice or three times or four times a month so they're a little different but I think it's calculated once a month paying on it more than once a month does not change the math do you understand yeah cool what's good to talk to you thank you for calling you that's a good question hey guys thanks for watching if you enjoyed this video click the subscribe button to get the latest content and check out these other great clips from the show and so you have to break the cycle you have to flip this thing on its head and make it behave you've got to get so fired up and wired up that you're broke friends think you've lost your mind you

Channel: The Dave Ramsey Show

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Keywords: how do principal payments work on a home mortgage?, mortgage, credit, loan, mortgage payment, interest, mortgage interest, home, principal, payments, financial, ramsey, ramsey solutions, debt, dave ramsey baby steps, dave ramsey 2016, budget, show, living a debt free life, investing, dave ramsey financial peace university, dave ramsey live

Id: 1JdCYPSQAg4

Length: 8min 33sec (513 seconds)

Published: Wed Jul 13 2016