Mortgage Principal vs Principle: What’s the Difference?
Short answer
The correct term when discussing a mortgage is "mortgage principal," which means the amount of money you originally borrow or still owe on your loan before interest is added. "Principle" is a different word meaning a fundamental rule or belief, so using "principal" with an "a" is the right choice when talking about mortgages.
What is mortgage principal in simple terms?
Mortgage principal is the amount of money you borrow from a lender to buy a home or the remaining balance of that loan that you still owe. It does not include the interest charged by the lender. For example, if you take out a mortgage loan for $250,000, that amount is your principal at the start. After making payments for several years, if you have paid off $50,000 of the loan, your remaining principal would be $200,000. The principal balance is important because it reflects how much money you still need to repay.
Understanding principal also helps you know your home equity, which is the difference between your home’s current market value and your outstanding mortgage principal. For instance, if your home is worth $300,000 and you owe $200,000 on your mortgage principal, your equity is $100,000. Building equity is a key goal for homeowners, as it represents the portion of the home you actually own.
How does mortgage principal work with interest payments over time?
When you make a mortgage payment, part of it goes toward reducing the principal, and part goes toward paying interest—the fee the lender charges for borrowing money. Early in the loan term, a larger portion of your payment typically goes toward interest because interest is calculated on the outstanding principal balance. As the principal shrinks over time, the interest portion of each payment decreases, and more goes toward reducing principal.
For example, if your monthly payment is $1,500, in the early months, about $1,100 might cover interest and $400 might reduce principal. Years later, the split might change to $700 interest and $800 principal. This gradual shift means that your loan balance decreases faster as you move further into the loan.
Knowing this can help you decide if making extra payments toward principal is a good strategy. When you pay extra on principal, you reduce the amount on which future interest is calculated, lowering your interest costs and shortening the loan term.
Why does knowing the mortgage principal matter to borrowers?
Knowing your mortgage principal balance helps you understand how much you still owe and plan your finances accordingly. It also indicates how much equity you have in your home, which can be useful if you consider refinancing or selling.
If your goal is to pay off your mortgage faster, making extra payments toward principal can save you money by reducing the total interest you pay. For example, if you add an extra $200 to your monthly payment and specify that it is to be applied toward principal, you will reduce the loan balance faster. To ensure this happens, you can say to your lender, “I’d like this extra payment to go directly toward reducing my principal balance.”
It’s important to confirm with your lender how they apply extra payments. Some lenders might apply extra payments as advance payments on future installments unless you specify they should reduce principal.
What is the difference between "principal" and "principle"?
"Principal" and "principle" sound the same but have different meanings. In mortgage terms, "principal" refers to the amount of money borrowed or still owed on a loan. For example, you might say, “My mortgage principal is $150,000.”
"Principle" means a fundamental belief or rule, such as “She follows the principle of honesty.” Using “principle” instead of “principal” when talking about a mortgage is incorrect and can confuse people.
A helpful way to remember this is that “principal” contains the letter “a” like “amount,” which relates to money or numbers. “Principle” ends with “-le,” like “rule.” Using the correct spelling ensures clear communication, especially in financial or legal documents.
How can you check your current mortgage principal balance?
To find out your current mortgage principal balance, start by reviewing your monthly mortgage statement. This statement shows the amount you owe after your last payment, including how much of your last payment went toward principal and interest.
If you have an online account with your lender, log in to view your current principal balance and even your amortization schedule, which details how your payments apply over time.
If you cannot locate this information, call your lender directly and ask, “Could you please tell me my current mortgage principal balance?” Using this clear phrasing helps customer service provide the right information quickly.
Knowing your current principal balance helps you track your loan progress and make informed decisions about extra payments or refinancing.
What mortgage terms do people often mix up with principal?
Several mortgage terms can be confusing because they sound or look similar:
- Mortgagee vs. Mortgagor: The mortgagee is the lender, the entity that loans you the money. The mortgagor is you, the borrower. For example, “The mortgagee approved the loan for the mortgagor.”
- Principal vs. Interest: Principal is the amount borrowed or outstanding. Interest is the cost you pay the lender for the loan. Your monthly payment covers both.
- Escrow: An account where money for property taxes and insurance is held by the lender, separate from your principal and interest payments.
- Amortization: The schedule showing how each payment split between principal and interest, and how your loan balance decreases over time.
Learning these terms can help you better understand your mortgage. For more detailed explanations, check resources like Common Mortgage Terms Explained and Mortgage Explained: Basics for Homebuyers.
What steps can you take next to manage your mortgage principal wisely?
Managing your mortgage principal well can save money and reduce the length of your loan. Here are specific steps you can take:
- Review your mortgage statements monthly. Check how much of each payment reduces principal and track your loan balance to stay informed.
- Make extra payments toward principal when possible. Even an extra $50 or $100 per month can lower your principal faster. When sending an extra payment, include a note or call your lender to specify: “Please apply this extra payment to principal only.”
- Use online mortgage calculators. Input your loan details and extra payment amounts to see how much time and interest you could save.
- Ask your lender questions. If you’re unsure how to make extra payments or how payments are applied, call and say, “Can you explain how my payments are applied to principal and interest?”
- Consider refinancing carefully. Refinancing might lower your interest rate or change your loan term, which affects principal payments. Understand the costs and benefits before proceeding.
- Educate yourself about mortgage basics. Reading articles like Common Mortgage Questions and Answers can help you feel confident managing your loan.
By following these steps, you can build equity faster and potentially pay off your mortgage sooner.
Frequently asked questions
Can I pay only the mortgage principal and skip the interest?
No. Your mortgage payments include both principal and interest. Skipping interest payments can lead to default. If you have trouble paying, contact your lender or a housing counselor for help options.
Does paying extra on principal lower my monthly payment?
Extra principal payments reduce your loan balance and overall interest but usually do not lower monthly payments unless you refinance. Instead, they shorten your loan term.
What if I accidentally write "principle" instead of "principal" on mortgage forms?
While it’s a spelling error, it usually doesn’t affect the legal meaning of the document. However, correct spelling is important for clarity and professionalism.
How do I know if my mortgage payment is mostly interest or principal?
Early in the loan, payments mostly cover interest. Your mortgage statement or amortization schedule shows the split between principal and interest for each payment.
Is mortgage principal the same as home equity?
No. Principal is the amount you owe on the loan. Home equity is your ownership in the home, calculated as the current market value minus the mortgage principal balance.