What does "Principal" mean?

Definition

The principal is the original amount of money you borrow for a loan. Your monthly payments go toward reducing this balance, along with paying the interest.

Understanding Principal in Mortgages

Principal comes into play when you're discussing mortgage payments or loan balances. It's the amount you borrow and need to repay over time. For instance, if you take out a $200,000 mortgage, that $200,000 is your principal. As you make payments, part of each payment reduces this principal. Example: With a $1,000 monthly payment, a portion goes toward the principal and the rest covers interest. It's not just the full loan amount; it changes as you pay it down. A common misconception is that the principal includes interest, but it doesn't. Interest is what you pay for borrowing.

People Want To Know

Is it better to pay the principal or interest?

Paying the principal reduces the overall loan balance and decreases the total interest paid over time. Paying interest, on the other hand, does not lower the loan amount and only covers the cost of borrowing. Prioritizing principal payments can lead to significant savings in the long run.

What happens if I pay $500 extra a month on my mortgage?

Paying an extra $500 a month on your mortgage directly reduces the principal balance, which can significantly decrease the total interest paid over the life of the loan. This extra payment can shorten the loan term, allowing you to pay off the mortgage faster. For example, on a $300,000 mortgage at a 4% interest rate, paying an additional $500 a month could reduce the loan term by several years.

What does a mortgage in principle mean?

A mortgage in principle is a statement from a lender indicating how much they are willing to lend you based on your financial situation. It is often based on a preliminary assessment of your income, creditworthiness, and debts. This document helps you understand your borrowing capacity before you start house hunting.

Flip the Script - Master mortgage objections

More From The Mortgage Glossary

Principal, interest, taxes, and insurance (PITI)

PITI is an acronym that stands for Principal, Interest, Taxes, and Insurance. These four components make up your total monthly mortgage payment and are used by lenders to assess your ability to repay the loan.

Private mortgage insurance (PMI)

Private mortgage insurance, or PMI, is a policy that protects the lender in case you default on a conventional loan. It's required if your down payment is less than 20% of the home's value.

Property taxes

Property taxes are taxes paid to local governments based on a home’s assessed value. They are used to fund public services like schools, police, and roads.