Principal
Principal is the original amount you borrowed on your mortgage, or the remaining balance you still owe. Each monthly payment you make includes two parts: interest (the cost of borrowing) and principal (reducing what you owe). In the early years of a mortgage, most of your payment goes toward interest, with only a small portion reducing principal.
On a $350,000 mortgage at 7% for 30 years, your first payment of $2,329 breaks down as roughly $2,042 in interest and only $287 in principal. That's 87% of your payment going to interest! By year 15, the split is more balanced—about $1,600 interest and $729 principal. This front-loading of interest is called amortization.
Making extra principal payments—even small ones—can dramatically shorten your loan and save significant interest. Adding $200/month to principal on that same $350,000 loan could cut 5 years off the term and save approximately $85,000 in interest. Many lenders allow extra payments with no penalty on conventional and government loans.
Your principal balance is different from your home's equity. Equity equals the home's current market value minus the principal balance. If you owe $300,000 on a home worth $420,000, you have $120,000 in equity. Building principal through payments and building equity through appreciation are two separate (but related) wealth-building mechanisms.
Key Takeaway
Principal is the original amount you borrowed on your mortgage, or the remaining balance you still owe. Each monthly payment you make includes two parts: interest (the cost of borrowing) and principal (reducing what you owe). In the early years of a mortgage, most of your payment goes toward interest, with only a small portion reducing principal.
Related Terms
Frequently Asked Questions
Make extra principal-only payments each month, make one extra payment per year, or refinance to a shorter term (like a 15-year mortgage). Even small extra payments compound significantly over time.
Because interest is charged on the outstanding balance, and your balance is highest at the start of the loan. As your balance decreases over time, less interest accrues each month, so more of each payment reduces principal.
Most conventional and government loans allow lump-sum principal payments without penalty. Contact your servicer to confirm the process and ensure the extra payment is applied to principal, not applied as a future payment.
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