What Is Principal Balance?

When you take out a mortgage (or any type of loan), the original amount you borrowed is called the principal balance. Take note that this doesn’t include interest and other fees. So, if your original home loan is $300,000, then that is the principal.

As you make regular monthly payments for your mortgage, your principal balance decreases. And the faster you are able to pay off this debt, the quicker you are able to acquire full ownership of your home.

However, take note that some payment schemes are negative amortization or interest-only plans. This means that when you pay every month, that money is paying off certain monthly charges or interest only and none of it goes to the principal. As a result, you could end up with the same or an even bigger debt at the end of your loan term.

Ideally, you should select a payment plan that allows you to make monthly deposits towards paying off your principal and interest and/or other fees. One example is amortization, which lets you make regular monthly installment payments on your principal and interest over a fixed period of time. And when your loan term ends, your balance is zero.

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Some mortgage plans even allow you to make extra payments on the principal so that you can pay it off even faster. You can use online tools or talk to your loan originator to assess what type of mortgage and payment scheme is best for your financial status.

 

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