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Principal is the amount borrowed or remaining balance on a mortgage or loan. When making a monthly mortgage or loan payment, a portion of the money is directed towards paying down the principal in addition to the interest rate charged for use of the money. In the early stages of a mortgage a larger proportion of the monthly payment is used to pay for interest, while later in the life of the loan, a large proportion is directed to principal.
If we look at a 30 year loan of $100,000 at 6% interest rate, the monthly payment would be $599.55. For the first monthly payment, $500.00 of the payment is to pay the interest expense and $99.55 is used to pay down the principal.
In the 25th year of the loan, the monthly payment would still be $599.95, however with an outstanding principal balance of only $31,000 on the loan, $442.28 of the payment goes towards principal pay down and only $157.27 is needed to pay the interest expense. |
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