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Short Summary
Main recommendation: Pay extra toward mortgage principal early and often, which lowers future interest because interest is calculated only on the outstanding balance each month. Dave Ramsey explains that extra principal payments don't change the required monthly payment, but shift more of each future payment toward principal.
Key Points
- A mortgage's monthly interest equals the annual interest rate divided by 12, multiplied by the outstanding balance that month; the rest of the payment reduces principal.
- Because the payment stays the same while the balance drops, each later payment sends more toward principal and less toward interest.
- A one-time principal payment (Ramsey's example: a $1,000 gift) doesn't lower the monthly payment; it reduces the balance that future interest is charged on.
- Interest is not "paid up front" in a mortgage; you only pay interest on what remains outstanding, so paying the balance down saves interest.
- Sending more than one payment per month doesn't change the math, because mortgage interest is recalculated once a month, not daily or weekly.
Details Worth Noting
- Concrete instructions:
- Calculate monthly interest: take the annual interest rate, divide by 12, and multiply by the current outstanding balance.
- Apply your regular payment: the interest portion comes out first, and the remainder reduces principal.
- To make a principal-only extra payment, send extra money designated for principal (Ramsey's example: $10,000 toward a balance).
- To see the effect of a lump sum without doing the math, find your current balance in your mortgage amortization table, slide down to the row closest to the new lower balance after your extra payment, and that row shows your new payment-number position (Ramsey's example: from payment 37 to about payment 61).
- Make one payment per month; additional monthly payments in the same month do not change the calculation.
- Ramsey's worked example: a $100,000 loan at 3% interest produces about $250 of interest in the first month (100,000 × 0.0025), so a $450 payment puts $200 toward principal.
- The next month's interest on a $98,800 balance is lower (Ramsey used about $247), so the principal portion rises to about $203.
- Ramsey notes that this is simple interest calculation and is how mortgages are typically calculated; some credit cards calculate daily or multiple times per month, so they work differently.
- Ramsey says that after 15 years of a 30-year mortgage, the payment still looks the same, but far more of it goes toward principal.
- Ramsey recommends throwing extra money at the mortgage early and often, especially at Baby Step 6, which the caller is planning toward.
Bottom Line
Extra principal payments save interest by shrinking the balance that interest is charged on, while your required payment stays the same, so the key lever is the lump-sum principal payment rather than the frequency of monthly payments.
