Understanding a mortgage principal

Understanding a mortgage principal

When you take out a mortgage on a home, you’ll generally have your regular payment automatically deducted from your account, to cover the entire amount. Why does that happen? The reason is simple. Your mortgage payment may consist of several elements: the mortgage principal and interest, property taxes and mortgage life insurance.  So what is the principal?

Mortgage Principal is the amount borrowed from the lender, minus the amounts repaid to the lender, and which have been applied to the reduction of principal. As monthly mortgage payments are made, the mortgage principal is reduced.

Not all of your mortgage payment will be used to reduce the mortgage principal. Interest will need to be paid to the mortgage holder for the use of the money lent. This is a part of your monthly mortgage payment. Many people are often surprised to learn how little of the mortgage payment made in the beginning of a loan is used to reduce the mortgage principal.

The reason for this is simple. Because the mortgage principal is at its highest in the beginning of the loan, and because the payments are spread out over a long period of time, usually 25 years or more, more interest will be charged at the beginning of the loan.

As the mortgage payments are made and the principal is reduced, a greater percentage of the mortgage payment is applied to decrease the principal.

Also, it is important to remember that besides making mortgage payments in a timely manner, there are other methods of reducing your mortgage principal, provided your mortgage permits additional payments, or prepayment.