A playful reminder: Just like your school principal was your pal, your mortgage principal is too! Let’s understand it better.
Have you ever wondered what the principal of your mortgage really means? Here’s a friendly analogy: Think back to your school days. Remember the principal? They were your pal (hopefully!). Similarly, the principal of your mortgage is the portion of your loan that’s truly on your side – the part you’re working to pay off so you can fully own your home.
In this article, we’ll dive deep into what mortgage principal is, how it affects your monthly mortgage payments, and how making smart decisions now can save you thousands over the life of your loan.
What is the Principal of Your Mortgage?
At its core, your mortgage principal is the amount you borrowed from your lender to buy your home. If your home cost $250,000 and you put down $50,000, your starting principal would be $200,000.
Every time you make a payment, a portion goes towards this principal balance and the rest goes toward interest (and often taxes and insurance).
How Your Monthly Mortgage Payments Work
Each monthly mortgage payment typically includes:
Principal: Reduces your loan balance Interest: Paid to the lender for borrowing the money Taxes: Property taxes, usually held in escrow Insurance: Homeowner’s insurance (sometimes private mortgage insurance too)
The more you pay toward your principal early on, the less interest you’ll pay over the life of the loan.
Why Paying Down Principal Early Can Save You Thousands
Here’s a little secret: Interest is calculated on your remaining principal balance. That means the sooner you reduce your mortgage principal, the less total interest you’ll pay.
By making even one extra payment per year, you can shave years off your loan term.
Smart Ways to Lower Your Mortgage Principal Faster
Make Biweekly Payments Instead of Monthly
Split your monthly payment in half and pay every two weeks. This results in one extra full payment per year.
Round Up Your Payments
If your payment is $980, round up to $1,000. Those small extra amounts chip away at your mortgage principal.
Apply Work Bonuses or Tax Refunds
Whenever you get a windfall, apply it directly to your principal.
Set Up Automatic Extra Payments
Schedule an extra $50 or $100 monthly towards the principal. Over time, it makes a big difference.
Refinance to a Shorter Term Loan
Going from a 30-year to a 15-year mortgage increases monthly payments but dramatically reduces total interest.
Recast Your Mortgage After Large Lump Sum Payments
This lowers your monthly payment based on your new lower balance without changing your interest rate.
Avoid Skipping Payments
Even if your lender offers a “skip a payment” deal, skipping just one payment increases your interest cost.
Understanding the Principal of Your Mortgage
The principal might sound complicated at first, but once you break it down, it’s really straightforward. Think of it like your home loan’s “starting point.” Every dollar you pay against it gets you one step closer to owning your home free and clear.
Why Understanding Mortgage Principal Matters for New Homeowners
New homeowners often overlook how small early payments toward principal reduce interest over decades. A proactive approach to your mortgage principal can help build equity faster and protect you from market fluctuations.
Common Misconceptions About Mortgage Principal
“I’m paying mostly principal at first” – Not true. In the early years, you mostly pay interest. “Extra payments don’t help much” – False. Every extra dollar reduces future interest. “Principal is the same as total mortgage cost” – Nope! Total cost = Principal + Interest + Taxes + Insurance.
FAQs About the Principal of Your Mortgage
What does mortgage principal mean?
It’s the original loan amount you borrowed minus any payments already made.
How can I check my current mortgage principal balance?
Check your latest mortgage statement or log into your lender’s online portal.
Is it good to pay off my mortgage principal early?
Do extra payments automatically go to principal?
Yes! Early payments reduce your total interest and help you build equity faster.
Not always. Specify when submitting extra payments that it’s for “principal only.”
Can refinancing reduce my principal?
No, refinancing won’t reduce your principal unless you choose a cash-in refinance by making an upfront payment.
What’s the best strategy for lowering principal quickly?
Making biweekly payments and applying lump sums when possible are both excellent strategies.
Outbound Links:
Consumer Financial Protection Bureau – Mortgage Basics Investopedia: What Is Mortgage Principal?
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