Principal is the original amount of money you borrowed for your mortgage, or the remaining balance you still owe. Each monthly payment reduces the principal by a small amount.
Your mortgage payment is split between principal and interest. In the early years of a loan, the majority of each payment goes toward interest, with only a small portion reducing the principal. As the loan matures, this ratio flips, and more of each payment goes toward paying down what you owe.
For a $300,000 30-year mortgage at 7%, your first monthly payment of about $1,996 includes roughly $1,750 in interest and only $246 in principal. By year 20, the split reverses: about $1,100 goes to principal and $896 to interest. This pattern is determined by the amortization schedule.
Making extra payments directly toward principal can dramatically reduce the total cost of your loan and shorten the repayment period. Even small additional amounts each month add up over time. Check that your lender applies extra payments to principal (not future payments) and that your loan has no prepayment penalty.
Amortization is the process of spreading a loan into equal monthly payments over time. Each payment covers both interest and a portion of the principal balance.
EquityEquity is the difference between your home's current market value and the amount you still owe on your mortgage. It represents the portion of the home you truly own.
Prepayment PenaltyA prepayment penalty is a fee that some lenders charge if you pay off your mortgage early, either through refinancing or making extra payments. Most modern conventional loans do not include prepayment penalties.
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