Understanding Principal and Interest in Your Mortgage Payment
If you’re a homeowner, you’re likely familiar with the concept of paying principal and interest on your mortgage. However, it’s important to understand exactly what these terms mean and how they affect your monthly mortgage payment. Here’s what you need to know.
What is Principal?
The principal is the amount of money that you borrow to purchase your home. When you make your monthly mortgage payment, a portion of it goes toward paying down the principal balance of your loan.
What is Interest?
Interest is the cost of borrowing money from your lender. It’s expressed as a percentage of the loan amount and is added to your monthly mortgage payment. The amount of interest that you pay decreases over time as you pay down the principal balance of your loan.
How Principal and Interest Affect Your Monthly Payment
Your monthly mortgage payment is based on the amount of your loan, the interest rate, and the length of your loan term. When you first start making payments on your mortgage, a larger portion of your payment goes toward paying interest. As you pay down the principal balance of your loan, a larger portion of your payment goes toward paying down the principal.
Understanding the concepts of principal and interest is important for managing your mortgage payments and planning for the future. By understanding how your monthly mortgage payment is calculated, you can make informed decisions about your finances and your home ownership goals.