Principal
Principal is the actual amount of money you borrowed to buy your house — it’s the portion of your mortgage balance that isn’t interest, fees, or anything else. Every monthly payment chips away at it, but in the early years, most of your payment goes to interest instead.
How Principal Repayment Works
Mortgages are front-loaded with interest. On a 30-year loan, your first payment might be 75% interest and only 25% principal. By year 15, it’s roughly 50/50. By year 25, you’re mostly paying principal. This pattern is called amortization, and it’s why building equity feels painfully slow at first.
Extra payments go directly to principal and can dramatically shorten your loan. Even $100/month extra makes a measurable difference.
Dollar Example
You borrow $350,000 at 7.00% for 30 years. Your monthly payment is $2,329. In month one, $2,042 goes to interest and only $287 goes to principal. By month 120 (year 10), you’ve paid $139,480 in interest but only knocked $69,980 off your principal. Check our amortization schedule to see this breakdown for your loan.
Watch Out
Some borrowers confuse their home’s equity with their principal balance. They’re related but not the same. Your principal balance is what you still owe. Your equity is your home’s value minus that balance. If your home drops in value, your equity shrinks even though your principal keeps going down with every payment.
If you’re considering extra principal payments, make sure your lender applies them correctly. Specify “apply to principal” — otherwise some servicers might credit it toward your next month’s payment instead, which doesn’t reduce your interest cost at all.
Real-World Example
You have a $300,000 mortgage at 7.00% for 30 years. Your monthly payment is $1,996. In the first month, $1,750 goes to interest and only $246 goes to principal. If you add $300/month in extra principal payments from day one, you pay off the loan in about 21 years instead of 30, saving $148,000 in total interest. That extra $300/month effectively earns you a guaranteed 7% return (your interest rate) on every dollar applied to principal. Few investments offer a guaranteed return that high.
Run the Numbers
Use our mortgage calculator to see how principal applies to your specific situation. Plug in your numbers and compare scenarios before making any financial commitments.
Related Terms
Understanding principal connects to several other concepts: Amortization, Interest Rate, Equity, and PITI. Each of these terms interacts with principal in ways that affect your buying power, monthly costs, or investment returns.
Frequently Asked Questions
Should I make extra principal payments on my mortgage?
It depends on your rate and what else you could do with the money. At 7%+, extra principal payments are a solid guaranteed return. At 3-4% (if you locked in during 2020-2021), that money might earn more in index funds. Run the numbers on our mortgage calculator to see how extra payments affect your payoff timeline.
What happens when I make extra principal payments?
Extra payments reduce your outstanding balance faster, which means less interest accrues each month. This creates a compounding effect — each extra payment saves more than the last. Make sure to specify ‘apply to principal’ when making extra payments, as some servicers may otherwise credit the amount toward your next monthly payment.
Is principal the same as equity?
No. Principal is the remaining balance you owe on your loan. Equity is your home’s market value minus what you owe. Principal goes down with every payment; equity can go up or down based on both payments and property value changes. You build equity by reducing principal and through home appreciation.