Principal is the part of a monthly loan payment that reduces the outstanding balance of a mortgage, and becomes the equity for the borrower.

By making extra payments toward your principal on a monthly or annual basis, you can greatly reduce how much interest you pay over the mortgage term. In the first few years of your mortgage loan, most of your monthly payments go toward the interest you owe.

If you make an extra payment toward principal during this time, you can shave off tens of thousands in interest fees over the life of your loan, thus getting a 30-year loan paid off in, say, 22 years.

Posted in Refinance Glossary.