Hanna Kielar4-minute read
PUBLISHED: April 27, 2023
When you borrow money from a mortgage lender, you agree to repay the full loan amount – along with interest – over an established period of time. The original amount you borrow is known as the loan principal, and you’ll make payments each month until your principal balance is fully paid.
Let’s examine what the principal on a loan is, how it differs from interest and what you can do to pay down the principal balance on a mortgage.
When you’re approved for a mortgage to buy a house, the principal balance is the purchase price of the home loan minus the down payment. For example, if you take out a loan for $200,000 and make a 20% down payment worth $40,000, the principal of your loan would be $160,000.
A principal balance doesn’t just apply to mortgage loans – you’ll be expected to pay back the original amount on any loan you take out, including auto and personal loans. When determining how much you’re comfortable paying back and how much house you can afford, the loan principal is one of the most important factors to consider.
If the principle is the original cost of the loan, then interest is the price you pay the lender to borrow that original sum of money.
The higher your principal, the more you’re likely to pay over time. The interest payments you’ll make are determined in part by the principal amount and also by other factors such as your mortgage interest rate and how quickly you pay off your home loan.
You pay on the principal balance of your mortgage by making regular monthly payments. The money from these payments goes toward your principal and interest until there is no loan balance left.
Another part of your monthly payment will also be allocated to homeowners insurance, property taxes and possibly private mortgage insurance (PMI). You’ll make monthly mortgage payments over the entire loan term, or life of the loan, unless you’re able to pay your loan principal off earlier than scheduled. Mortgage loans typically have a loan term of 15, 20 or 30 years, with the term often varying depending on the type of mortgage loan you choose.
The process of paying back your mortgage with regular monthly payments is called amortization. A loan amortization schedule shows how much of your monthly payment goes toward the interest and principal.
As you make regular payments, the overall principal balance will decrease, reducing how much of your monthly payment will go toward interest (since interest is based in part on how much you owe in principal). As you move deeper into your loan term, a larger portion of your payments will apply to the loan principal.
Some loans, including mortgages, may offer principal-only payments. These payments are supplementary to the minimum amount due. Principal-only payments go exclusively toward your principal, rather than the interest owed.
Not every lender offers principal-only payments as an option since these ultimately cost the mortgage company money they would otherwise claim in interest. Before you start making these payments, some lenders may require a notice that you’re interested in applying additional funds toward your principal balance. Other lenders may charge a prepayment penalty, which is a fee for paying off your loan principal before your original loan term ends.
While principal-only payments don’t decrease the amount of your monthly payment, they can help save you money on interest in the long run. Here are some other advantages to making principal-only payments against your home loan:
You can find the amount of your loan principal, as well as your monthly principal and interest payments, on your initial loan documents. When you take out a mortgage, this information is detailed on your Closing Disclosure. A Closing Disclosure also lists your total closing costs and other fees associated with your mortgage, like homeowners insurance and property tax payments.
You can also find your current loan principal on your billing statements. If you have any questions about the principal balance on your loan, you can always contact your lender for more information.
Your loan principal is the amount of money you originally borrowed to take out your mortgage, or the amount you still owe your lender. Interest and other potential fees are in addition to loan principal. While an amortization schedule can help predict how long you’ll be paying back your home loan and the amount of your monthly payments until the loan is paid off, it’s possible to pay the principal balance down faster. Just make sure you notify your lender if this is your plan.
Are you ready to buy a home and find the best loan option for you? Apply for mortgage approval today. Our team of Home Loan Experts can help you determine the type of mortgage, the loan principal and the loan term that work best for your situation.
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