Definition
Principal is the actual amount borrowed. Each monthly payment includes principal reduction (paying down what you owe). Early payments are heavily weighted toward interest, but principal accelerates over time as balance decreases.
Not sure where this fits?
Answer a few questions and we’ll open the path that fits, at the right step.
Find my pathAbout this term
Early mortgage payments are heavily weighted toward interest, with only a small portion reducing principal. As the loan matures, the principal portion increases while the interest portion decreases. By the end of a 30-year mortgage, most of each payment goes toward principal.
Pro Tip
Making extra principal payments early in the loan can dramatically reduce total interest paid and shorten the loan term.
Example
In month 1 of a $300,000 mortgage at 6%, the $1,799 payment includes $1,500 interest and only $299 principal; by year 20, the split reverses significantly.