Mortgage principal is the amount you borrow from your lender to purchase your home. If your lender gives you $250,000, for example, your mortgage principal is $250,000.
You’ll pay this amount off in monthly installments for a predetermined amount of time, maybe 15 or 30 years. You also might have heard the term outstanding mortgage principal before. This refers to the amount you have left to pay on your mortgage. If you’ve paid off $50,000 of your $250,000 mortgage, your outstanding mortgage principal is $200,000.
Mortgage principal payment vs. mortgage interest payment
Your mortgage principal isn’t the only thing that makes up your monthly mortgage payment. You’ll also pay interest, which is what the lender charges you for letting you borrow money. Interest is expressed as a percentage.
Maybe your principal is $250,000, and your interest rate is 3 percent annual percentage yield (APY). Along with your principal, you’ll also pay money toward your interest each month. The principal and interest will be rolled into one monthly payment to your lender, so you don’t have to worry about remembering to make two payments.
Mortgage principal payment vs. total monthly payment
Your combined mortgage principal and interest rate make up your monthly payment. But you also will have to make other payments toward your home each month. Among these expenses:
Property taxes: The amount you pay in property taxes depends on the assessed value of your home and your mill levy, which varies depending on where you live. You may end up paying hundreds of dollars toward taxes each month if you live in an expensive area.
Homeowner’s insurance: This insurance covers you financially in case something unexpected happens to your home, such as a robbery or tornado. The average annual cost of homeowner’s insurance was $1,211 in 2017, according to the most recent release of the Homeowners Insurance Report by the National Association of Insurance Commissioners.
Mortgage insurance: Private mortgage insurance (PMI) is a type of insurance that protects your lender if you stop making payments. Many lenders require PMI if your down payment is less than 20 percent of the home value. PMI can cost between 0.2 percent and 2 percent of your loan principal per year. PMI only applies to conventional mortgages, or what you probably think of as a regular mortgage. Other types of mortgages usually come with their own types of mortgage insurance and sets of rules.
Homeowner’s association fees: If you live in a neighborhood with a homeowner’s association, you’ll also pay monthly or annual dues. But you likely will pay your HOA fees separately from the rest of your home expenses.
Will your monthly principal payment ever change?
Although you’ll be paying down your principal over the years, your monthly payments shouldn’t change. As time goes on, you’ll pay less in interest (because 3 percent of $200,000 is less than 3 percent of $250,000, for example), but more toward your principal. So, the adjustments balance out to equal the same amount in payments each month. While your principal payments won’t change, however, there are a few instances when your monthly payments could still differ:
Adjustable-rate mortgages: The two main types of mortgages include adjustable-rate and fixed-rate. While a fixed-rate mortgage keeps your interest rate the same during the entire life of your loan, an ARM periodically changes your rate. So, if your ARM changes your rate from 3 percent to 3.5 percent for the year, your monthly payments will be higher.
Changes in other housing expenses: If you have PMI, your lender will cancel it once you gain enough equity in your home. It’s also possible that your property taxes or homeowner’s insurance premiums will fluctuate over the years.
Refinancing: When you refinance, you replace your old mortgage with a new one with different terms, including a new interest rate, monthly payments and term length. Depending on your situation, your principal could change when you refinance.
Extra principal payments: You do have an option to pay more than the minimum toward your mortgage, either monthly or in a lump sum. Making extra payments reduces your principal, so you’ll pay less in interest each month. (Again, 3 percent of $200,000 is less than 3 percent of $250,000.) Reducing your monthly interest means lower payments each month.
What happens if you make extra payments toward your mortgage principal?
As previously mentioned, you can pay extra toward your mortgage principal. For example, you could pay $100 more toward your loan each month, or maybe you pay an extra $2,000 all at once when you get your annual bonus from your employer. Extra payments can be beneficial, because they help you pay off your mortgage sooner and pay less in interest overall. Supplemental payments aren’t right for everyone, however, even if you can afford them. Some lenders charge prepayment penalties, or a fee for paying off your mortgage early.
You probably wouldn’t be penalized every time you make an extra payment, but you could be charged at the end of your loan term if you pay it off early, or if you pay down a huge chunk of your mortgage all at once. The conditions of your prepayment penalties will be in the mortgage contract, so take note of them before you close. Or, if you already have a mortgage, contact your lender to ask about any penalties before making extra payments toward your mortgage principal.