mortgage
Principal
The principal is the original amount borrowed on a loan, or the outstanding balance still owed — excluding interest. On a mortgage, principal is the portion of each payment that reduces the loan balance.
When you take out a $350,000 mortgage, the principal is $350,000. As you make payments, each month a portion reduces the principal. The interest you pay is calculated on whatever principal remains outstanding.
Paying extra principal — even small amounts — reduces the remaining balance, which means future payments accrue less interest. This is why extra payments on a mortgage can shorten the loan term significantly.
Put this into practice with our free calculator:
Open calculator →Related terms
- Amortization
- Amortization is the process of paying off a loan through scheduled, equal payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.
- Interest Rate
- An interest rate is the percentage of the principal charged by a lender to a borrower for the use of money, or paid by a bank on deposited funds. It is quoted as an annual percentage.
- Loan-to-Value Ratio (LTV)
- The loan-to-value (LTV) ratio is the mortgage amount divided by the property's appraised value, expressed as a percentage. An LTV above 80% typically requires private mortgage insurance (PMI) in the US.
Frequently asked questions
What is Principal?
The principal is the original amount borrowed on a loan, or the outstanding balance still owed — excluding interest. On a mortgage, principal is the portion of each payment that reduces the loan balance.