How Do Principal Payments Work on a Home Mortgage?
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- Опубликовано: 28 авг 2024
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Bought my house in 2013 and it'll be paid off next month!
100% debt free at 31 !!!
So....how does it feel? I sincerely hope COVID-19 did not throw a wrench in your plans. Enjoy your financial freedom! We'll be done with baby step 2 next month and after we get our emergency fund fully stocked up we're going to attack the principal on our house with a vengeance!
@@rangerfan1868 thank you! Yup I paid off my house! It feels great waking up knowing you don't owe anything to anybody! And no, covid-19 doesn't effect me as I'm an RN. Yes, keep throwing anything you can at the principal of your house! Keep it up!
@Craig Wallace thanks!!!
dsmdriver2588 That’s great
Congrats!!! What a great feeling you must have can't wait to feel that way some day too!!! 🤞
I refinanced in August a $122K mortgage from 4% to 2%. I got a part time job (doing something I love to do) and am using the entire paycheck to pay down principal each month. Will be mortgage free by January of 2023.❤️ We’ve never had car payments and pay our credit card off each month. We taught all of our children how to live frugally and save for the future. Now we are teaching our 2 grandsons those same lessons. We’re both 68 and healthy. Thanks for all you do Dave!
That's awesome work you did and you're sitting pretty now!
Inspiring thank you
Susan how is that mortgage looking for 2023😇😁
Winning…. ❤
Checking in.. you're one month out, how you feeling about owning the house?
Never take a home loan that penalizes you for making payments early or paying extra payments.
common sense lol.
Are US banks allowed to offer you loans without the ability of making early payments?
That is a regulatory requirement for any loan in the European Union.
Mine has early pay off penalty, but it's still worth paying off early.
Unless that mortgage has worthy pros.....
Or any loan for that matter.
I paid off a 30 year fixed mortgage in 11 years by paying extra on the principal every month
inkey2 how much did you pay monthly
That's a major goal.
I made principal payments at 1/2 of my monthly mortgage payment ($400.00) each month on the 15th. Paid off my first home in 10 years, sold it, put 45% on my current home. Paying $600.00 each month on my current home. Now, I don't purchase new clothes, don't drive a new car, don't eat at Fast-food places, refuse to shop at Walmart/Target/Hobby Lobby/Home Goods---it requires discipline but it's worth it.
ethiopianabesha why would you not shop at Walmart? That’s one of the cheapest places for goods
Sam The Kings Fan Walmart sucks. They only want you to believe its cheap, but allot of the times its not even close to cheaper. People are so brainwashed into thinking Walmart saves them money they don’t even think to do their own research.
This man changes people's life
For the better.
Indeed! God bless Dave and Crew!
I paid off my 30 year, 4.25% rate, 5 figure condo mortgage in 12 months, put every every spare penny, roommate money, and killed my savings to do it but it is worth it.
mudhudgie95 keep emergencies fund tho
@runbear Technically he could have, but each investment is a risk and requires extreme discipline whereas paying quickly a mortgage gives you huge, and safe savings.
@runbear Yes, that is hind sight though, He could have lost money. Paying off debt is NEVER a "bad move". No investments are a "sure thing".
Just imagine all the money you just saved and can invest/emergency fund
Technically no, it is tied in the house. So to access it would cost you. I guess I don't get the pay off the 3-4% mortgage (this is 3-4% locked in for term of loan even if rates go up, inflation takes off etc, that is good for lender)... meaning 7yrs down the road you are paying with future dollars (inflation figured in), while investing in stocks and bonds which historically after inflation are paying 6-9%). I think paying the mortgage off 1st vs investing 1st is a mistake (assuming all other debts are pain, student loans, vehicles, etc etc). Time value of money... you can't get back 10yrs worth of double digit growth in the stock market. Use "good" leveraged debt = home/business to grow exponentially with a 20-35yr timeline
I like making my extra payments weekly, not because of any special math but more psychological. Similar to how paying off smaller debts first boosts your confidence to keep going, I want to make sure that as soon as payday comes I make the extra payment. Once I'm more disciplined with time, money, scheduling I can change that up.
Im doing the same $100-$150 a week so far so good I started this month
One part of the discussion needs more explanation, and that was that when more goes to the principal, it means the loan gets paid off earlier and you pay much less interest in total. So if you had 100k loan for 30 yrs at 3%, your payments would be $421.60. The total interest on the life of the loan would be $51,165.87. Now let's say the FIRST MONTH you paid an additional 10k. This works out to paying off your loan *54* months earlier!!! It would also save you almost $13k over the life of the loan.
In fact, if you paid only $50 additional/month, that loan would turn into a 303 month loan rather than 360 mo loan, and you would save $9k of interest on the life of the loan.
Magic of compounding interest!
@larrybud power of *amortizing* interest.
The compounding interest is calculated ahead that's why if you pay more than the minimum amount you save on future interest. I might be wrong though but, that's my layman's understanding of ammortisation
"Oh OK" This is the very stuff they need to teach in school. 1984 my first period class was Economics. Later in life I would compare my mortgage statements. It was like a drug to make those extra principle payments. I have paid off two houses in my life. Nothing beats that feeling.
68k for us left on our home, we will pay this off this year although we have 5 years left. We had a 15 year 237k mortgage
I was a senior accts mgr at a major bank for over thirty years and never saw these principles explained better than here.
We were all taught these facts during High School Economics classes, but at age fifteen, we promptly forgot them, lol
I was today years old when I finally understood how my mortgage interest works... even after my husband trying to explain it a dozen times. Thanks, Uncle Dave.
I keep my amortization schedule handy and I mark on it every payment we make. Since we always pay extra it's awesome to watch how much we save on interest and how fast we are progressing through it
Dave Ramsey has gotten me out of more debt!!!! I just want to say thank You Dave!!!!
please please stop this nonsense!
Dave didnt do anything. YOU did!
Dave paid your
debts? 😂
We keep our monthly amortization schedule for our mortgage printed out and on the fridge. I LOVE crossing out multiple lines every month...just a few more years until we can cross that last line (originally dated for 2042!!!!!) off!
I do the same:-)
Robyn Rosado Do you have to make the schedule yourself? Or do they give it to you? Buying my first house in a couple months lol
Robyn...That is such a great idea!!! Thanks for sharing
Wow, I'll do the same.
I love this idea. Thank you!
Love Dave's philosophy. Being a mathematician, I'd like to point out one mistake. If you want to calculate the monthly interest from the annual interest p, you don't have to divide p by 12, but take the 12th root of p.
We are down to $128k! Can't wait till we finally pay off the house!
I Should Know This how did you do it? Can you share it? How you did.
Yo, can we get an update?! How are you doing?!
Wow!
@@Sesshyru No update, probably foreclosed...
Boss Moved and sold the house for $100k in equity for better school for the kids. Planing on building a house now with the equity.
a year ago , all this info would be a different language. Now it's second nature. Thank you Dave
AllinTMC Does anyone know why my principle payment keeps going up?
@@jameliarabsatt4954 it might be a variable rate mortgage, should have made sure it was fixed rate
By far one of the best most knowlege filled videos i've come across. It's amazing how many homes are owned yet very few of us actually know how this works. Thank you Dave!
I don't like the term " homeowner " when the bank owns the home unless it is payed off. I can't wait until I truly "own" my home. Should be called " home payer "
5:27 so true! I've been saying this for the longest time. They don't teach you what you really need to know as you're going through school. no disrespect to Shakespeare or Trigonometry, but teenagers to learn as early as possible about principle vs. interest, balanced budgeting, and interest rates. These are the things that will truly affect them the rest of their lives.
That's because Big Business thrives on incompetent people that spend more than they earn.
Codithejedi The government too for that matter.
So true. We also wouldnt have a national student loan problem if kids really understood how money and life works. Knowing how to manage money makes life simpler.
Dani P But of course the government and huge corporations rely upon the ignorance of the general public. That's how they make money.
My junior high had a class that taught basic financial things, like doing taxes, filling out a resume, getting a mortgage etc. However this was an elective class, not a core class like it should have been.
THIS MAKES SENSE! Thank you caller for your question, and Dave for your explanation!
I got my home paid off in 11 years due to lowering my ammortisation period to 12 years as well as doubling the payments.....I saved myself at least $60,000 in interest to the bank.....I also slammed the mortgage with yearly over payments.
15 year mortgage in 3 years and 7 months. It needs dedication and self control. But it’s possible
Personal finance and how the monetary system works should be mandatory in high school. Schools are very negligent preparing young people for the real world.
even if you learn about in high school though, if you're not buying your house till 30 that's a long time for that knowledge to decay. I'm pretty sure I did learn some of this in high school but it was so long ago it might as well have never happened. But that's what people like Dave Ramsey are good for, reminding us.
They are trying to indoctrinate not teach.
They are designed to keep sheeple subservient to the elites.
And parents are even more negligent. Stop depending on others to teach your kids about life.
yeah and they get to university and first booth they see is giving away a credit card to ruin their life after graduation
it depressing how on a 30 year note the first 10-15 years is mostly interest...you dont start really hitting the principal towards the end.
working shlub, Thanks for commenting and watching this video! Don't forget to subscribe! ruclips.net/user/DaveRamseyShow
The reason for this is due to how amortization works. If you amortize a loan to make the same payment throughout the life of the loan, than yes, the amount applied towards interest has to be more early on. You could instead amortize to make the same principal payment each month, but it would mean your payments are higher early on and lower later on. This is the opposite of what most people want, as we tend to earn more money as time goes on.
Yeah, good point. And the sad part is most people move or Refi by then anyway, so they start the whole dreadful process all over again!!!
What is worse is how much you have paid for the house after 30 years. It’s way more than the principal plus interest rate. This is why renting in many ways is better.
Arvind Talukdar - renting is never a gd option, since you’re paying on someone’s mortgage ( a home or apt complex)
The big secret about home mortgages is the fact that banks will allow you to get into a 30 year home mortgage with a relatively small payment amount so that you can buy a lot of house compared to your salary (or buying power). BUT, that small payment is all interest, and almost no principal. So think about that; since you are paying so little in principal on your monthly home mortgage payments, you just don't make any progress on paying off your house, and so all your payment money is going to the bank and NONE of it is going towards your house. With this kind of loan, it take nearly 10 years before you've made any progress in the interest to principal balance of your monthly payments. It is the biggest legal rip off on earth. That's why Dave suggests a 15 year mortgage for the same priced home, where the early monthly payments actually do make you some progress in paying off the principal. The alternative for those with a 30 year mortgage is to use any extra money to make additional payments towards your home mortgage, instead of saving it or investing it. To see the wisdom here, do some simple math. One hundred dollars of extra payment on your mortgage in the first month will save you paying three percent on that same one hundred dollars over the next 30 years. That's $3.00 a year times 30 years = $90. That's a 90 percent return rate over 30 years, guaranteed. And that's at 3 percent, not too many home mortgages are out there at a fixed 3 percent, most vary, which means your return on that $100 might be much more.
Speaker Builder Why commit to a house you can't afford. Fifteen year mortgage is not necessary if you apply money to your principal. The problem is people do not know how to manage money and understand what you are signing.
I think it also depends where you live. I'm in Toronto and there are 0 homes for under a million. The average wage is still the same as everywhere else, however. If you want a house at all you must take a very long term mortgage or figure out a way to make hundreds of thousands a year to get a shorter term one. There really isn't any other option.
Speaker Builder you need to annualized your interest paid then compare this annualized interest paid to annualized the opportunity cost of interest you could earn investing those same moneys.
Speaker Builder Same $100 over a 30 year 3% compound interest will yield you $243 and with 10% annual returns will yield more than $1700
@@rajeshpurushotham430 What do you mean compound interest?? Where are you putting the money?
We have a Home Equity Mortgage (not a line of credit) through the same bank we have all our other liquid accounts, so it's nice to be able to see all of our accounts on one online screen, plus our Bill Pay tab. When I want to pay extra on the Home Equity, there is a box to check that's asking me if I want it to be a "Principal Only" payment - absolutely! Yes, check that box. And it DOES knock it further down if you do want to make an extra bit of a payment, say, every week, or every two weeks. At least, that's how ours works. There is a significant dip in the interest charge the next month when I have been able to even put an extra $50 in a calendar month directly toward the principle. The object of the game is to knock the principle down quickly; it's a waste of money to not specify that you want it to go directly to the principle.
I recently have started paying on principle for the 2017 Silverado my husband thought he needed. I tried by paying an extra $50 in the regular online payment through our bank. The next invoice did not reflect that it all went to principle. I read ALL the fine print then and, still unsatisfied, I made a phone call to the creditor. Turns out, there is a completely different address to sent Principle Only Payments to - ha! So now I have a tighter grip on that bill because I decided to own it more.
I haven't worked in several months because I've been doing cancer, but I hope to get back out there in the next few weeks. Now that the chemotherapy fog is lifting I'm able to see that our finances got really messed up this year, and it hasn't helped that I was let go from a long-time job a little over two years ago. I am so grateful that I found D.R. and am learning to turn it all around - still on the first baby step! My husband looks at me sideways when I ask him how much his bottle of Pepsi cost, but he's slowly understanding that we need to account for EVERY dollar while we get back up on our feet.
I hope the last two years have been awesome for you and your husband, Meggan! :)
This is a really good video and explanation on how this works. I guarantee there are a lot of homeowners in America who don't know how this works.
This explains the beauty of paying off your house early!! Everyone please follow this advice like gospel. No matter what, make curtailment payments every month!!
be careful, some banks will take your extra money as normal payment and say you good , your ahead on paymens. Say no, I want that towards Principal balance
Will they do that with a mortgage? I know what you are talking about. I had a credit union do that to me on a small personal loan, but I didn't know that they would do it with a mortgage
You need to write “towards principle”
On the check
Yep, you need to make a separate payment that is marked ‘apply to principal ‘.
If they have an online option do it that way. You can allocate where your overpayment money goes.
My student loan servicer says they can't apply a payment only to principal. You must pay off any interest at time the check is cashed and sometimes by the time the check is cashed it can't only be applied to principal - therefore they void the checks because they can't follow the special instructions. What you do is say "do not advance due date". Mortgages probably don't have the same issues since the interest is calculated monthly rather than daily with student loans and as long as your additional payment is applied the same month as the interest payment you can probably get away with "apply to principal". But I would expect some slimy banks to void "apply to principal" checks on the same grounds as student loans so they can make an extra buck.
It's crazy what we don't know when we don't ask.
This is the best calculation breakdown i have ever seen. Thank you so much for making it so simple to understand.
This is the most informing video I’ve found from Dave... thanks for everything you do Dave! I owe 118k on my home and I’ve been wondering if I should put my tax return on my mortgage and now I definitely know I will.
This was super helpful! I'm slowly starting to put larger payment down on principal and am starting to see more of my payments actually impacting my total amount owed. By my calculations I could pay off my 20 year mortgage in 10 years! Cant wait lol
The simplest way to calculate how to pay off the mortgage in specific timeframe is to use a financial calculator.
I recommend the Hewlett Packard HP 10bII; costs about $35 and has a very nice informative instruction booklet.
Set the current Unpaid Principal Balance (UPB), also called the Present Value (PV), of the mortgage loan amount.
Set the interest rate, usually the annual interest rate and the calculator will adjust for monthly interest.
Set the Future Value (FV) to zero for fully amortizing (i.e., fully paid off).
Set the number of payments (N) to when you want the loan completely paid off.
Then calculate the monthly payment (PMT).
Make that monthly payment (PMT) every month for N months, and the loan is paid down to FV (zero in this example).
In the mid '80s I bought my first house. The payment was in the $500 range on something in the 9% range. With the loan we got an amortization schedule. I noticed that the principle payment was like $16 and increased as the loan was paid off. I figured out that if I added an extra $16 or what that amount for the next payment was, I essentially made a $500 payment for $16 dollars. That is for $16 I reduced the number of payments by one payment. Of course the next month, that $16 would go up a dollar or so. But you could quickly knock off 5 Years of the loan. Each principle payment you make, you are essentially making the loan interest rate on that money for the remaining term of the loan.
It would indeed be nice if more practical things were taught in school. It also might work if PARENTS taught more of those things at home.
Parents have to know it first to teach it haha.
In a perfect world the parents would also be perfect, but that's not the world we're in. So as a society if you want a better society we need to take care that the youngest are getting the best we can give them. I know people with kids who should never be parents, but they are and we allow it.
Maryann Anderson gefhhsegsedgt
Maryann Anderson Absolutely
This is common sense
Every time u make extra payments make sure u tell the bank that the extra payment is going to your principal otherwise the bank is just gonna push your payment to the next month
All Alabama schools need your program Mr. Ramsey especially the inner cities schools
I thought all schools had it, I was required to take a personal finance to graduate and I ended up taking 2. One focused a whole semester just one the Dave Ramsey method and the other one I took required us to work 20 hours a week and put it in practice. It also counted as 2 credits so 1 credit focused on financial literary and then we got out of school 2 hours early to go to our jobs and our employers had to sign off saying we worked and performed
From Leo: My first mortgage (1980, 15% ) company offered to give me an amortization schedule for $10. Now they are free on the internet. It was the best $10 I ever spent. The 1st payments were only putting $3.00 against the principle a month. With that table, I learned how to make make extra principle and knock a couple years off every year. $50 extra the first year accelerated me past the 2nd year We paid off a 30 year FHA loan in just under 11.
Extra payments in $50 bites (and growing) can work wonders on a mortgage!
This is a good one and something everyone should hear.
Even making one extra payment a year, really affects the amortization table.
At our HS the money class was to practice finding an apartment or a car to buy, how to write a check. No real advice about how to pay for it all 😂
Mrs. T is Going Debt Free Mine was the other way around-how you’re going to pay for it, but not what to look for
They taught us how to write a check in elementary school. But they never taught us about credit, managing money, or investing.
Never was taught any of that. Glad to have found Ramsey!
What is "HS"?
@@sl523 High School
Thank you!!! No one has ever explained it to me this simple.
"ok so... 1 I just have like a pretty weird personality so i might get all crazy here..."
What an intro lol
Hi Dave and team Ramsey, It would be useful to have a tool online on your every dollar app for people to compare 15 year and 30 year mortgage. Thanks for all you do!
I got taught this in high school. But it meant very little to me until I went to university and majored in finance. So yeah... very little kids find this relevant. What you found was relevant was if you hear your parents speak of this and discuss these issues. I’ll be sure to teach my kids all these things.
Mia exactly! Unfortunately, I’m the one who is teaching my family members because no one knew this but me. I’m currently teaching my cousin how to pay her house off. She is extremely thankful.
I just paid off my vehicle . Quit my crazy absurd buying of lotto & scratch tickets & am going to start paying more on my principal every month. It pays to listen to Dave on a regular basis .
Thanks, Dave... I just took 25,000 that I had set aside for a boat and dropped it on my mortgage. Saved around 12-13k in interest by doing that.
Lightbulb!!! This video was fantastic! It helped me and my wife figure out that refinancing would be a mistake, and we pay can off our house, save up for the next car and downpayment on the next house all within the next 4 years, maybe sooner, and then turn this current house into a rental with way more cashflow!
Dave is NOT correct! Simple interest is not the same as amortization. An amortized loan is front loaded interest. A rule of thumb is half way through the payment schedule the interest is paid and only principal remains. So on a 30 year MTG the first 15 years are primarily interest, the final 15 years of payments are primarily principal. You can pay additional moneys to principle but you need to specify that with your payment. This same schedule applies to vehicles as well.
You pay interest the entire 30 yrs except at the beginning the balance is big example 100,000 x 4% = 4000per yr interest divided by 12 months = 333.33 per month interest then when you principle balance is 10,000 x 4% = 400 interest divide by 12 = $ 33.33 per month
When Dave talks about a mortgage table, he’s referring to an Amortization Schedule. These used to be available from your mortgage company/bank for a fee. Today, you can find websites where you can print your own for free. If you want to turn your 30-year mortgage into a 15-year mortgage, you print out an Amortization Table and when you make your full (Principle, Interest, Taxes and Insurance or PITI) payment #1, you take the principle of payment #2 and send that designated as a “principle only” payment. Most mortgage coupons will allow for this. Or if you pay via the Internet it allows you to do so. Month #2, you pay the full PITI for payment #3 plus the principle from payment #4. Month #3, you pay the full PITI for month 5 plus the principle for payment #6. You are never in a position where you can “skip” a house payment because, as far as the mortgage co/bank is concerned you’ve only made 3 payments. But in reality, your next full payment is #7. Do this consistently and your mortgage loan is paid in 15 years. Want to payoff your mortgage in 10 years vs 30 years? Pay your PITI plus the next two scheduled principle payments. Print off the table and use a highlighter to keep track, so you always know where you are at. Again, you can’t ever skip your regular full mortgage payment. The beauty of this is you can start/stop paying the extra principle payments whenever you want without going through any hassle with the mortgage co/bank. And the extra principle is lower when you first start paying your payments and higher towards the end which, for most people will be higher earnings years.
This is the clearest/best explanation I have ever heard!
When I had a mortgage I printed the amortization schedule and would cross off the extra principal amounts as I paid them off. Paid it off in 7 years.
Holly B do you have to tell them to pay towards principal or does it automatically subtract it?
eyecandie2004 Yes you do have to tell the bank to apply an extra payment to the principle. Back when we had a mortgage, the slip we mailed in with our payment had an area labeled “additional principle.” Now we pay our home equity line of credit online and we check a box that says ‘apply to principle ‘.
What bank do you have ??
Melissa Mejia That was with Huntington Bank. We only used them for our mortgage. We paid it off 8 year ago
The "Full Report" section of Zillow's House Affordability Calculator has a great chart (with table) which shows, and essentially explains, the concept of proportionality between principal and interest, that Dave was trying to explain.
Meggan is more confused than ever now
Keorbats yes, she did not understand
Keorbats
Lol
It's a pretty simple concept
🤣
Just look at your monthly statements. Even car loan interest are calculated the same. Shhheeesh.
Love when he dose show by him self it sucks when u got the other people join him and agree on everything
This was a really great explanation of it!
Freckle Finance . Are you serious....that was the most confusing explanation I've EVER HEARD.....and it's obvious the girl had NO clue what he was saying...
@@neale.kaufman5168 You are right, Neal.
If u calculate your mortgage after 30 years u pay double or triple the price of the house
Alumnikiid and your point? Would you rather rent and save money for 40 years before actually buying a house?
That’s so true. It’s unbelievable.
Empire Textbooks His point is to manage the interest as much as possible because WITH INTEREST you pay 2.5X than you actually signed up for.
Angel Eyes33 but you didnt consider how much you’d be paying in rent before you actually could save up enough money to buy a house. Sure you would be paying a lot in interest but if you compare it to the amount of money that you would be spending on rent while you save up for the house it’s nothing near what you would be paying in interest.
That does not have to be true if your interest rate is low and you have put at least a 20% down. also, down the road when your income is higher then you can quickly pay off the principal.
Any extra dollar you send to your mortgage, is a dollar that won’t be charged interest
Right! $1 count too. Start somewhere.
I’m glad I watch this video because I was going to send a payment in on 1 -15. Now I know 1 payment only .
7:49 I think with my bank, I have to pay the normal payment and then after that goes through I can pay a Principal Only payment. If I sent the extra amount on one payment, it takes interest out of the extra payment as well. That's what I was taught, but I'm probably wrong.
Jared S that is exactly the way chase does it with our mortgage. We have to send an additional check for principal only.
Jared S interest is calculated on the balance owed, not the payment you make. Now the interest is “subtracted” from the payment you make but it’s not calculated on that payment. So they don’t take more interest if you make a bigger payment. Here’s the formula for interest calculation: mortgage balance x (interest rate/12) = the interest they take from your payment. So $100,000 loan, 3% int = $250 interest subtracted from your payment no matter how much you pay for the particular month. So $1,000 payment - $250 interest = $750 to principal (I’m leaving our insurance & taxes). Now if you make a $2,000 payment it’s still just $250 interest taken...again because interest is calculated on the mortgage balance.
Jared S the reason it’s best to make the regular payment & then send in the extra principal payment is so the finance company applies it as a principal only payment & not a prepayment of next months mortgage. You of course have to mark it “principle only” & they still may Jack it up.
You do it that way because if you don’t, they will consider the extra amount as a prepayment of next months mortgage payment so they’ll take interest from that portion of the payment too.
And as the principal goes down the length of the loan gets shorter! Dave failed to mention this key piece of information which is why you pay more against the principal.
I've had my house for 3 years and I put an extra $100 a month. I also put my 3 income taxes to the principal which I've paid an addition $17,000 to my principal in 3 years
Thanks for the clarification about the 'weekly' or 'daily' mortgage payments.
I love the disclaimer about her personality. I wish more people did this so I'd know to just walk away from the conversation.
Glad I was required to take a Corporate Finance class in college. I learned about Amortization schedule. I'm planning to make extra payments when I buy a house!
This makes a lot of sense and I’m so glad to know this now since before I had no clue
Dave Ramsey, the reason people pay 2 times a month is because your first bi-weekly check goes towards the principal only and your second bi-weekly paycheck (end of the month) is what you use to pay the monthly payment. Your first check says "apply exclusively to principle of mortgage" and your second check should say "Mortgage payment". You say make it all one big payment but this is so people don't slip up and lose track of how much they can freely use because the money is gone, you think you sacrifice 1 extra principle payment and you are gonna pay a normal interest in 1 month because it is calculated monthly but the reality is you are forgetting the principle payment before the first mortgage payment, there is your extra "useless" principle payment.
My dad always said never buy a house without a downpayment and if 20% of the loan is more than your annual income, at any moment you could potentially lose the ability to pay for the house because your savings account will never be double your yearly income right after buying a house. This is the mentality of buying one house and living in it forever, but if you have money and your savings account for half of it and you really want it, its not a smart move but you can go ahead and do it. Not related to the subject but I always like to say these kinds of things because sometimes someone wants to know what is the smart move if I don't go through the smart route.
Interesting, I might have to share this with my brother inlaw since hes looking for a home. Dave's advice in a 15yr mortgage being 25% of your monthly income is very difficult to achieve (especially in Miami). I just bought a house on a 30yr mortgage that takes up 25% of my monthly income but that includes insurance, interest, pmi and I have no other debts with a 6 month emergency fund in savings thanks to the baby steps. I plan on paying this house off in less than 8yrs or before I'm 38 so I guess their is some wiggle room but not recommended since I will technically be living on beans and rice for quiet some time lol.
@@mr.boostang2064 good for you guys and the market is going to correct itself for sure in the next 2 years so maybe some great deals pop up!
I agree that what is taught in school is not what is used in real life situations. I think basic math , grammar and reading should be emphasized then money management and health and nutrition and maybe some more advanced courses to prepare those going to college.
Mortgages are a scam. Look at an amortization table and see that the majority of payments for the first 10 years (not sure exactly on that) are primarily interest with very little going to principle.
06acc
correct! It's called front loading interest. A rule of thumb is half way through the term is when payments are principal.
That is logical because you are paying interest on the whole amount that you have loaned. That's why it is very important to pay off as much of prinicipal as possible in the first few years of the mortgage so that you can save yourself loads of interests.
Well the bank wants to make their money up front in case you stop paying or die or something
It's not a scam at all. It's a fixed-payment loan, meaning the total of P+I payment must be the same every month for the term of the loan. Your first month of interest is a month of interest on the entire loan principal, so it is the most interest you will pay in any month. The second month is a month of interest on the loan principal minus the first months principal. That makes sense, right? You can easily prepay principal any time you want, which will reduce how much interest you owe the next month, and every month thereafter. Which will mean more of the payment goes into principal. You can easily use an online mortgage amortization calculator to see the effect of prepayments.
When you pay extra principal amounts, you essentially skip ahead/fast forward in your amortization schedule, omitting the interest payments you would have made on the months you skipped forward over.
in australia it is calculated yearly and devided per day
Mr. Dave. Could you please make a summer school online learning Financial class for high schoolers. If it’s out there please send me the link.
I’m already an expert on this topic thanks to my student loans... they work the same way.
In Australia it is calculated daily, if you pay your home loan each week it pays your loan off faster, as shown in the loan calculators online.
I often wondered if we should send in small payments during the month but this definitely answered for us. Thanks.
LOL @ "Let's say I was gifted $1000...for I don't know...just being amazing"!
I thought she said “let’s say I was gifted $1000....or just doing amazing”
1k for doing amazing things to amazing ppl🤔🤑😂
*It amazes me how many people make the mistake of trying to invest their limited "extra" income into stocks and bonds, while wasting hundreds of thousands of dollars paying INTEREST on their mortgages, for 30 years -- or even for 40 or 50 years if they refinance without knowing what they're doing. For most of them, a far better solution would be to use that "extra" income to PAY OFF THEIR HOMES FIRST -- which, if they do it wisely, can often be done in just 5 or 6 years, by making large principle payments toward the beginning of their loan. THEN, when you no longer have a monthly mortgage, and own your house outright, start investing in stocks. It's not either-or; doing it in the right order is what makes the difference.*
*I say this, by the way, having done it wrong myself, before I knew what I was doing. I wasted a massive amount of money paying mainly interest, while trying at the same time to contribute to my IRA, and ended up so broke that I needed to borrow more on my mortgage to pay basic bills. I'm thankful that I learned, finally, what was wrong with this approach.*
Not really if you invest (sp500) right you'll have more savings money and a paid of house in 30 years, than if you pay extra on the house and not invest until it's paid off you'll have a paid of house and less saving in 30yrs. Compound interest!
This makes it so much clearer! Very helpful.
For those that are still confused. Example if your car payment is $350 a month and is due September 15th. But you made a $700 payment thinking it would cover $350 for September and $350 for October! You would be wrong! That extra $350 you paid will go towards the principal. And you would still owe $350 for the month of October! So if your loan amount was $40000 it will now be $39650. If you want to avoid this you have to specify with the bank of what you were trying to do!
WOW, paradigm shift in mortgage knowledge!
Paradigm shift? no just high school basics, or something any teenager can see using a home loan calculator online.
Folks, it's like 'chopping off' months at the end--bringing your end date closer. If it was originally due in 2033... you can finish EARLY. That's the point!
I had algebra,trig,geometry,advanced math,statistics,and calculus in school, but I think we spent one hour on principle and interest in the 9th or 10th grade. I don't think I fully understood amortization until I partially owner financed the sale of my first house. I am glad an effort is being made to offer financial advice to youth now. A little knowledge would have gone a long way when I started out.
I paid off my home loan in 5 1/2 years and then never took out another loan on anything. Look out for the the typical trap. Your mortgage company will apply any payment over and above what's due to prepaying interest, not reducing principal. Make sure excess goes to principal, and be sure the original loan is written so that this is the case. It's very difficult to do after the fact, especially as your loan might change hands more than once over the years. Watch your statements and balances very carefully.
This was really helpful! I bought my first house last summer and didn't quite feel quite enough job security to commit to the large monthly payment of the 15 year mortgage. But at the same time, the idea of 30 years of debt chafes on me. So starting very soon now that I've dealt with all the expenses of furnishing my first home, I hope to start applying extra cash flow to the principal like Meggan.
While a 15 year mortgage does require higher monthly payments, you also save yourself so much more money off of interest in the long term, especially since you'll get a lower interest rate with that plan. So if you can afford to put aside more money into your home per month, then you should do it.
I paid off my 30 year mortgage in 4 years, for real.
GoldenPimp I paid it In 3
How? Teach me!
@@kzamora2548 It is not something that can be taught. This isn't a math problem, it is a personality problem.
@@kzamora2548 Pay as much as possible to the mortgage on your bill each month. There will be an option to pay above and beyond the normal monthly payment towards the principal.
This one motivated me big time. I have the ability to knock it down hard now.
best thing to do is pay MORE principal in the beginning of the loan( I mean at least 50%) i.e first 2-4 years then you can pay normal extra payments. Another reason why you shouldnt buy too much house compared to your income.
I wish my high school has a Foundations in personal finance class
Love always Jasmine
My high school had one 10 years ago when I went. This first half of the class was about how to manage your finances and the second half was playing a computer game where you actually manage finances.
I got right on the game the first day and ignored the lessons (the teach let me thinking she was going to prove me as some kind of idiot). I ended up do long so well that the company that created the game interviewed me to find out if I hacked it.
I even won an award at the WV DECA for being the best in the state for finance.
“Gifted $1,000 for being amazing.”
How sweet. Can I get that every month? I mean, I think I’m pretty amazing myself. 😉
This makes so much more sense now. Thanks uncle Dave!
Dave thanks for the truth and explaining that so simply.
Thanks so much for breaking that down Dave! You bless you so much 🙉😁
take your total monthly payment and divide by 12 months..send that little extra every month and you can knock off that principal faster. easier than making one big payment each year.
working shlub apply that to the principal correct?
Marcie Jones yes
Usually mortgages are interest compounded daily so it is better to pay one large amount then wait every 30 days. You don't want the interest to accrue overtime.
Thanks Dave, I just learned an important lesson here.
The caller asked would she have to make the following month's mortgage payment if she made an extra payment toward principal this month. Dave replies , no. He is correct, next months payment is still due. However, by making extra payments you will lessen the length of your loan. For example, a 30 year mortgage could be reduced to a 25, 20 or even 15 year loan. Depending how aggressive the extra payments are.
In Australia, the interest is calculated on the daily balance like: (APR/12/days in that month)*balance, but only charged to the account at then end/beginning of the billing cycle. So in countries/banks where this is the case, paying more frequently than once per month does have an impact.
Sam McInturff I live in Malaysia. Here its the same thing, its what the banks here call 'daily rest'. Even if i put extra money on my mortgage account the bank will not deduct that extra amount that i put in. If I were to do this every month my mortgage account will become somewhat of a savings account with accumulated funds idling. It will not knock down the principal. I'm stuck with a 30 years mortgage it seems.
+Mohd Kamil 😲
Sam McInturff the same process stands. Just in your case you want to pay as much as possible as soon as possible. $1000 at the beginning instead of two $500 or four $250 payments throughout the month would save you interest.
Was hoping my monthly mortgage payment would go down after throwing down 20,000 into my principal. Doesn’t work that way, thanks dave.
But you'll be done with payments two years earlier, I bet!!!
no. your payment stays the same, the length of your mortgage is what decreases.
Loans don’t really work like that though because in the beginning of the loans you pay more interest than principal, but principal payments do knock down your principal! My first sentence is about if you just stick to a traditional loan payment
This advice is gold 🔑