Description: The article is about ditech login. The article is about one woman who are confused about the prepared interest and prepaid principal and she called for help. The author tells her about how do principal payments work on a home mortgage.
Megan is with us in Bakersfield California. Hi Megan how are you? I’m doing better than I deserve. How can I help? I have like a weird personality so I might get all crazy here. We’re on the tail end of baby step two. We only have $3,600 on the one bill. My husband is finishing the last of his prerequisites to start nursing school.
We are planing on bankrolling through with help from parents. We don’t want to take out loans. I am more of a future planner. I don’t like to think where we’re going to be in five years. I’m thinking more about the mortgage when my husband graduates. I have heard a lot about prepaid interest or prepaid principal and they don’t understand how that works. I was watching the pill method and then he was talking about taking out loans.
That’s where I was. How do principal payments work? It sounds like there’s some magic to it. There’s nothing magic to it at all. You take the interest rate of your mortgage and you multiply it or divide it by 12. You multiply that times for the outstanding balance that month,that is the interest charged that month. Does that make sense?
And the rest of your payment goes towards principle. Let’s make up some easy numbers. For example 3% interest rate. That’s current. That’s a quarter of a percent 0.25 per month if you divide 3% by 12. You’ll get a quarter of a percent per month. If you had a hundred thousand dollar loan,to make the numbers round because it’s a good lesson to walk through. It is 200 bucks. I should be able to do that in my head.
Two hundred fifty dollars of your payment that month if you have a hundred thousand dollar balance that three percent would go towards interest. If your payment was three hundred and fifty dollars,it wouldn’t be. It’s four hundred and fifty dollars. Then $250 went to interest,the other $200 would pay the $100,000 down to 998000.
Does that make sense? The next month your interest is calculated on ninety eight thousand eight hundred dollars at a quarter. So instead of being two hundred fifty dollars,if it’s two hundred forty-seven dollars but your payment is still four hundred dollars. But it will be a little bit less went to interest and a little bit more goes to principal.
So instead of paying two hundred dollars towards principal the next month,it might be two hundred and three dollars. If every time you pay principal that makes your next payment more of it go towards principal and less towards interest.
For example I was gifted a thousand dollars and we went and put that on the principal. Would that change our payment the next month? No. A mint 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. It would cause your payment but the interest would stay the same but more of your payment would go towards principal. You don’t have as high an interest charge because you don’t have as high a 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. 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 principal,the following month than it did before.
So that’s why sometimes people say 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 because you only pay interest on what’s outstanding. Once you’ve paid on the mortgage for years and years and you paid the principal down,your payment is still the same much more of your payment goes towards principal after 15 years and a 30-year mortgage.
Then at the 28th year of a 30-year mortgage. This is the stuff that they should teach in high school because nobody taught me that. Good news is 36 percent 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 2/3 to go.
That’s called a simple interest calculation that I walked through with you. 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? It shows how much is going to interest,how much is going to principal and who you slide your finger down.
You’re down the page. You’re seeing a whole lot more after paying 120 payments paying 10 years,a whole lot more of it. It’s going towards principal and an interest. What happens is if you want to do this easy without having to do the raw math,if you pay ten thousand dollars on your balance, you slide your finger down the outstanding balance and your own payment number thirty-seven when you did it.
Then you pay ten thousand dollars then you’re going to drop down it might be looking more like payment number 61. There’s going to be your next payment. You’re knocking out chunks of payments. It’s going to be calculated payments 61 wherever the balance is closest to the New Balance after you paid your $10,000 bucks down. It’s an item that helps a lot. I was worried about it because I want to get it paid off within like 10 years after he graduates.
That’s why throwing money at the mortgage early and often when you get to baby step 6 it is so important. 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. So if you send for payments in a month,it doesn’t change the math at all.
Now they all go towards principal. But you might as well send one check. I’ve seen these groups with these supposed systems that they’ve gotten all this where you 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. Nut anything is calculated once a month. Paying on it more than once a month does not change the math. Do you understand? It’s good to talk to you and that’s a good question.