A mortgage principal is the amount you borrow to buy your home, and you'll pay it down each month

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What is a mortgage principal?

Your mortgage principal is the amount you borrow from a lender to buy your home. If your lender gives you $250,000, your mortgage principal is $250,000. You'll pay this amount off in monthly installments for a predetermined amount of time, maybe 30 or 15 years.

You may also hear the term outstanding mortgage principal. 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% 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

Together, your mortgage principal and interest rate make up your monthly payment. But you'll also have to make other payments toward your home each month. You may face any or all of the following expenses:

  • Property taxes: The amount you pay in property taxes depends on two things: the assessed value of your home and your mill levy, which varies depending on where you live. You may end up paying hundreds toward taxes each month if you live in an expensive area.
  • Homeowners insurance: This insurance covers you financially should something unexpected happen to your home, such as a robbery or tornado. The average annual cost of homeowners insurance was $1,211 in 2017, according to the most recent release of the Homeowners Insurance Report by the National Association of Insurance Commissioners (NAIC).
  • Mortgage insurance: Private mortgage insurance (PMI) is a type of insurance that protects your lender should you stop making payments. Many lenders require PMI if your down payment is less than 20% of the home value. PMI can cost between 0.2% and 2% of your loan principal per year. Keep in mind, 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.

You may choose to pay for each expense separately, or roll these costs into your monthly mortgage payment so you only have to worry about one payment every month.

If you live in a neighborhood with a homeowner's association, you'll also pay monthly or annual dues. But you'll likely pay your HOA fees separately from the rest of your home expenses.

Will your monthly principal payment ever change?

Even though 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% of $200,000 is less than 3% of $250,000, for example), but more toward your principal. So the adjustments balance out to equal the same amount in payments each month.

Although your principal payments won't change, there are a few instances when your monthly payments could still change:

  • Adjustable-rate mortgages. There are two main types of mortgages: adjustable-rate and fixed-rate. While a fixed-rate mortgage keeps your interest rate the same over the entire life of your loan, an ARM changes your rate periodically. So if your ARM changes your rate from 3% to 3.5% for the year, your monthly payments will be higher.
  • Changes in other housing expenses. If you have private mortgage insurance, your lender will cancel it once you gain enough equity in your home. It's also possible 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 that has 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% of $200,000 is less than 3% of $250,000.) Reducing your monthly interest means lower payments each month.

What happens if you make extra payments toward your mortgage principal?

As mentioned above, you can pay extra toward your mortgage principal. You could pay $100 more toward your loan each month, for example. Or maybe you pay an extra $2,000 all at once when you get your annual bonus from your employer.

Extra payments can be great, because they help you pay off your mortgage sooner and pay less in interest overall. However, supplemental payments aren't right for everyone, 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.

Not all lenders charge prepayment penalties, and of those that do, each one handles fees differently. 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.

Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews.

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