Principal and Interest
Definition and meaning of Principal and Interest in real estate.
Principal and interest refers to the combined portion of a monthly mortgage payment that goes toward paying down the original loan balance and paying the lender's borrowing fees. This combination is the foundation of standard amortizing loans, designed to eventually pay off the debt in full.
In more detail
Most home buyers make a single monthly payment to their loan servicer, but that payment is split into different accounts. The principal portion reduces the outstanding loan balance, while the interest portion pays the lender for the use of the money. In the early stages of a fixed-rate mortgage, the interest share dominates, whereas the principal share grows larger as the loan matures.
Lenders often refer to this base payment as P&I, which does not include property taxes or home insurance.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | P&I |
| Primary components | Loan repayment and lender borrowing cost |
| Excludes | Taxes, insurance, and association fees |
A borrower has a monthly mortgage payment where one portion is allocated to principal and interest, while the remaining portion is held in escrow for property taxes and homeowners insurance.
Frequently asked questions
How does the ratio of principal to interest change over time?
Through amortization, early monthly payments consist mostly of interest, while later payments consist mostly of principal.
Can I pay only the principal portion of my mortgage?
No, standard amortizing mortgages require you to pay both principal and interest together in your scheduled monthly payments.