Loans
Principal
The amount of money you borrow to buy a home, not including interest. If you buy a $400,000 home with $80,000 down, your principal is $320,000. Each monthly payment reduces your principal balance, though in the early years of a mortgage, most of your payment goes to interest. Making extra payments toward principal is one of the fastest ways to build equity and pay off your mortgage early.
Why It Matters
Principal is the amount you borrowed — the original loan balance. Each monthly payment includes a portion that goes to principal (reducing what you owe) and a portion that goes to interest (the cost of borrowing). Early in a 30-year mortgage, only about 15-20% of your payment goes to principal. By the final years, it's 95%+.
Understanding principal matters because it directly determines how fast you build equity. Every extra dollar you pay toward principal immediately reduces your balance, which means less interest charged in future months. This creates a compounding effect — $200/month extra in principal payments on a $300,000 loan at 6.5% saves $62,000 in interest and pays off the loan 7 years early.
Real-World Example
Month 1 of a $300,000 loan at 6.5%: Payment $1,896. Interest: $1,625 (85.7%). Principal: $271 (14.3%). Month 180 (year 15): Payment $1,896. Interest: $1,064 (56.1%). Principal: $832 (43.9%). Month 300 (year 25): Payment $1,896. Interest: $340 (17.9%). Principal: $1,556 (82.1%).
Pro Tip
Making one extra mortgage payment per year (either as a lump sum or divided into 12 extra monthly amounts) can shave 4-5 years off a 30-year mortgage.