Mortgage & Home Loans

What is Principal?

Principal is the amount you borrowed to buy your home. Each mortgage payment you make has two parts: principal (which reduces your balance) and interest (the cost of borrowing). The principal is what you actually owe—separate from the interest charged on it.

In the early years of a mortgage, most of your payment goes toward interest. As your principal balance drops, so does the interest calculated on it, letting more of each payment go toward the principal.

Make extra principal-only payments and you directly reduce the balance that future interest is calculated on. This shortens your loan and saves you thousands.

Quick Facts

Balance ReducerDirect principal-only payments

Interest Calculation BaseRemaining unpaid principal balance

Initial Amortization FocusMainly interest, minor principal

Payoff ImpactSaves interest and shortens loan term

PRACTICAL EXAMPLE

Say you owe $300,000 at 6.5% on a 30-year mortgage. Your monthly payment is $1,896. The first month, $1,625 goes to interest—only $271 actually reduces your balance. By year 15, that shifts: $775 of your payment now goes to principal as your balance has dropped.

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RELATED TERMS

Learn More Key Concepts

MortgageA loan secured by real estate that you pay back in regular installments over a set term.

Interest RateThe percentage charged by a lender for borrowing mortgage funds, representing the annual cost of credit before fees.

AmortizationThe process of paying off a mortgage over time through regular, structured payments split between principal and interest.

RefinancingThe process of replacing an existing mortgage with a new one under different interest rates or terms.

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Automated tools are not a substitute for professional counsel. We strongly advise that you consult a qualified Certified Financial Planner (CFP®), Registered Investment Adviser (RIA), Certified Public Accountant (CPA), or legal expert before making significant decisions regarding taxes, mortgages, retirement planning, investments, or debt management.