Process
Principal
The amount of money you borrow, or the portion of your balance still owed — separate from the interest charged on it.
What does principal mean?
Principal is the actual debt: the sum you borrowed to buy the home, and the balance that remains as you pay it down. Each mortgage payment splits between interest (the cost of borrowing) and principal (which reduces what you owe).
Early in an amortizing loan, most of the payment is interest and little touches principal; that flips over time.
Paying extra directly toward principal is powerful because it erases all the future interest that dollar would have accrued — the core reason a payoff or extra-payment strategy saves so much.
A Michigan example
Buy the median Michigan home near $285,000 with 5% down and you borrow about $270,750 in principal. In the first year of a 30-year loan, most of each payment covers interest, so the balance barely moves.
Add even $100 a month straight to principal and you chip the balance down faster, cutting years off the loan and thousands in lifetime interest.
Common questions
What's the difference between principal and interest?
Principal is the amount you borrowed and still owe; interest is the lender's charge for lending it. Each monthly payment splits between the two, with interest dominating early in the loan and principal taking over later.
Why should I pay extra toward principal?
It erases all the future interest that dollar would have accrued, so extra principal — especially early — can cut years and thousands off the loan. It also builds equity faster, giving you more ownership sooner.
How do I make sure extra money goes to principal?
Tell your servicer explicitly to apply it to principal, not to prepay next month's payment. Confirm there's no prepayment penalty first — standard conforming loans don't have one, so extra payments simply shorten the loan.
Related terms