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- The mortgage principal is the amount you borrow from your lender to buy your house.
- Your monthly mortgage payment goes toward both the principal and interest.
- You have the option to make extra payments toward your principal to pay down your mortgage more quickly.
What is a mortgage principal?
Your mortgage principal is the amount you borrow from a lender to buy your home. If your lender gives you $250,000, your mortgage principal is $250,000. You'll pay this amount off in monthly installments for a predetermined amount of time, maybe 15 or 30 years.
You may also hear the term "outstanding mortgage principal." This refers to the amount you have left to pay on your mortgage. If you've paid off $50,000 of your $250,000 mortgage, your outstanding mortgage principal is $200,000.
Defining the key term
When you make your monthly mortgage payment, part of your payment goes toward interest, part goes to principal, and part goes to other costs. Here's mortgage principal explained:
The amount you borrow
When you first take out your mortgage loan, the amount you borrow is your principal balance. As you make your payments each month, this balance gradually decreases, with the goal of paying off the balance by the time you reach the end of your term (often 30 years).
Separate from interest and other costs
Your mortgage principal isn't the only thing that makes up your monthly mortgage payment. You'll also pay interest, which is what the lender charges you for letting you borrow money.
Interest is expressed as a percentage. Maybe your principal is $250,000, and your interest rate is 3% annual percentage yield (APY).
On top of this, you will typically pay into an escrow account, too. This is used to pay for property taxes, home insurance, and mortgage insurance, if your loan requires it.
How mortgage principal works
Mortgage principal plays a key role in your costs as a borrower. Here's how it works:
Amortization: paying down principal over time
If you get a fixed-rate mortgage, your loan will be amortized, meaning it will be spread across even monthly payments until the end of your term.
Because of this, most of your monthly payment goes toward interest in the beginning of your loan. As time goes on, you'll pay less in interest (because 3% of $200,000 is less than 3% of $250,000, for example), but more toward your principal.
Early payments: more towards principal, less interest
Want to learn how to pay down your mortgage principal faster — and thus reduce your total interest costs? It all comes down to extra payments. Pay $100 more toward your loan each month, or maybe you pay an extra $2,000 all at once when you get your annual bonus from your employer. You can also switch to bi-weekly mortgage payments. All of these will help reduce your principal balance faster.
Just be careful: Some lenders charge a mortgage prepayment penalty, or a fee for paying off your mortgage early. You probably wouldn't be penalized every time you make an extra payment, but you could be charged at the end of your loan term if you pay it off early, or if you pay down a huge chunk of your mortgage all at once.
Not all lenders charge prepayment penalties, and of those that do, each one handles fees differently. The conditions of your prepayment penalties will be in the mortgage contract, so take note of them before you close. Or if you already have a mortgage, contact your lender to ask about any penalties before making extra payments toward your mortgage principal.
FAQs
You can check your monthly mortgage statement or log into your online account with your mortgage servicer. If you don't have one, call up your loan servicer and ask for an update over the phone.
Yes. Your principal balance will decrease with each monthly payment you make. At the beginning of your loan, most of your monthly payments will go toward interest, but as you get further into the loan, more and more will go toward principal.
Understanding your mortgage principal can help you track your payoff progress, as well as the long-term interest costs you're incurring. The quicker you reduce your principal, the less in interest you will pay over the long haul.
To reduce your mortgage principal faster, you can make occasional extra payments, switch to bi-weekly mortgage payments, or consider refinancing into a shorter loan term.
Mortgage interest is calculated based on your principal balance each month. As your principal reduces, the interest you pay on it will decrease as well.
Mortgage principal is how much you still owe on the loan, while interest is the cost of borrowing the money. Your interest rate will vary based on your credit score, debt-to-income ratio, and other financial factors. You can use a mortgage principal calculator to determine how much interest you will pay over time.
Mortgage calculator
Use our free mortgage calculator to see how the amount you borrow affects your monthly and long-term payments.
Mortgage Calculator
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 each month would reduce the loan length by 146 months
Click "More details," and you can read more about making extra payments toward your mortgage. Paying more each month can reduce your mortgage term by years.
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