Principal vs. Interest Explained

Your monthly mortgage payment is split into two primary components: principal and interest. Knowing how they differ is crucial for understanding how you build equity in your home.

What is Principal?

The principal is the actual amount of money you borrowed to buy the home. When you make a principal payment, that money goes directly toward reducing your loan balance. Reducing your principal balance builds your home equity.

What is Interest?

Interest is the fee the lender charges you for borrowing the money. It is calculated as a percentage of your remaining principal balance. When you pay interest, it goes to the lender as profit and does not build your equity.

How the Split Changes Over Time

In a standard fixed-rate mortgage, the scheduled principal-and-interest payment generally stays level while the original terms remain in place. Your total housing payment may change if property taxes or insurance premiums change. Meanwhile, the ratio of principal to interest shifts with each payment.

• Early years: Your balance is high, so the interest charge is high. Most of your payment goes to interest.
• Later years: Your balance is low, so the interest charge is low. Most of your payment goes to principal.

You can see this shift by looking at our Amortization Tables, or model your own split with the Mortgage Calculator.