In mortgage lending, principal refers to the original amount of money borrowed, or the remaining outstanding balance of the loan at any given time. When you take out a $350,000 mortgage, the principal is $350,000. Each monthly payment reduces the principal by a small amount (and pays interest on the remaining balance), so the principal gradually decreases over the life of the loan until it reaches zero at the end of the term. This process is called amortization.
Understanding how principal and interest interact is key to understanding your mortgage costs. In a standard 30-year fixed-rate mortgage, the total monthly payment (principal + interest) remains constant, but the split between the two changes dramatically over time. In the first payment on a $350,000 loan at 6.5%, approximately $1,896 goes to interest and only $316 goes to principal. By payment #180 (year 15), the split is roughly equal. By payment #300 (year 25), about $1,600 goes to principal and only $612 to interest. This shift happens because interest is calculated on the remaining balance — as the balance shrinks, less interest accrues, and more of each payment reduces the principal.
Making extra principal payments can dramatically accelerate loan payoff and reduce total interest costs. Adding just $200 per month to the principal on a $350,000, 30-year mortgage at 6.5% would pay off the loan approximately 6 years early and save over $96,000 in interest. Even one extra payment per year (made toward principal) can cut years off the loan term. Most mortgages allow prepayment without penalty, though you should verify by checking your promissory note.
Principal also has a related meaning in real estate transactions: a "principal" is a party to a transaction — the buyer or seller (as opposed to their agent or representative). And in power of attorney law, the principal is the person who grants authority to the agent. Context determines which meaning applies.
At closing, the principal amount of your new loan is documented on the closing disclosure and promissory note. The closing disclosure also shows your total payments over the full loan term and the total interest cost. Use Beycome's amortization calculator to see exactly how your principal reduces with each payment, or our mortgage calculator to model different scenarios. Get your free closing quote.