When you take out a loan to buy a home, you’ll pay it back with monthly mortgage payments. Some of your payment will go toward principal, and some will go toward interest charged on the principal.
Principal is the amount of money that you borrowed for a loan and need to pay back. It’s a key factor that impacts how much house you can afford, so it’s important to know how principal works before getting a mortgage.
Here’s a look at mortgage principal and how to pay it off.
How Is Mortgage Principal Calculated?
You can calculate your mortgage principal by subtracting your down payment from the home’s purchase price. For example, suppose you buy a home for $400,000 with a 20% down payment, which is $80,000 down. This means you need a $320,000 loan to cover the remainder of the purchase price. So, your loan principal is $320,000.
Where Can You Find Your Mortgage Principal?
When you apply for a mortgage, you’ll receive a loan estimate, which will include the loan amount you could be approved for — or your potential mortgage principal.
After underwriting and before closing day, you’ll receive a closing disclosure, which is a document that will outline the final details of your loan offer. One of these details is your mortgage principal.
Once you close on the loan, you’ll receive a monthly mortgage statement. Your mortgage statement will list your principal balance so you can track your progress. It will also show the amount you paid, and how much it reduced your principal. Many lenders let you access this information online at any time.
How Do You Pay Off Your Mortgage Principal?
You’ll pay down your principal with each monthly mortgage payment. Your initial payments will mostly go toward interest. Over time, more of your payment will go toward chipping away at your principal balance, and less will go toward interest. This process is called mortgage amortization.
When your principal balance is zero, you’ve completely paid off your mortgage.
Can You Make Extra Payments Toward Your Principal?
If you want to reduce your principal more quickly and own your home outright sooner, you can make extra payments toward your principal. These principal-only payments can help you pay off your mortgage early and save money on interest. Just make sure to confirm with your lender that these additional payments are going toward principal.
Keep in mind that some lenders charge a prepayment penalty if you pay off part or all of your mortgage early. Prepayment penalties compensate lenders for the interest that they otherwise would have collected. Before making principal-only payments, review your loan terms to find out if you’ll be penalized.
How Is Amortization Affected By Principal Payments?
With each monthly mortgage payment, you reduce your principal balance. This also reduces the amount of interest that will accrue over the next month, which allows for more of your monthly payment to go toward principal. An amortization schedule will show you how much of your total payment goes toward principal and interest each month over the life of your loan.
Amortization Calculation Example
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Here are answers to some frequently asked questions about mortgage principal.