Loan Principal

The loan principal is the original amount of money you borrow from a lender when you take out a loan.

What is a loan principal?

In your mortgage payments, there are two main elements that you pay off month-to-month: the loan principal and the interest. The loan principal is the amount you borrow to cover the cost of your home. The interest rate is a percentage of the principal amount that you pay the lender in exchange for giving you the loan. 

When taking out a mortgage, the principal loan balance is the most significant factor in determining how high your monthly payments are. Unlike your interest rate and other fees associated with your mortgage, your principal loan amount is not impacted by whether or not you’re a first-time home buyer, your loan type, your credit score, where you live, or your loan term.

Example of a loan principal

Let’s say you buy a home for $400,000, with a 20% down payment of $80,000 (FYI, if you pay less than 20% on your down payment, you may also be required to pay private mortgage insurance). You’ll need to borrow the remaining $320,000 from a mortgage lender. 

Once you apply and are approved for a home loan, you’ll receive $320,000 from the lender to cover the remaining cost of the home. That’s the principal loan amount. 

What else affects your mortgage payment? 

When it comes to your monthly mortgage loan payment, in addition to chipping away at the principal, you should also consider how much interest, taxes, and insurance you’ll be paying:

  • Interest payments on a loan depend on your credit score, loan amount, and loan type. Borrowers with a higher credit score, who take out a smaller loan amount and choose a shorter loan term, are more likely to receive a lower interest rate. 
  • Property taxes are determined by your local government, and are based on the value of your property. These taxes are used to support water and sewage maintenance and improvements; pay for law enforcement, fire departments, local schools, road and highway repair and construction; and other community services.
  • Homeowners insurance will be required by your mortgage lender, and covers damages that happen to or on your property. Think of it this way: your mortgage lender is kind of a joint homeowner with you. It’s in their best interest to keep your home in tip-top shape. If the worst happens to your home, the mortgage lender wants to know that your joint asset is covered—because if you don’t, you’d have little to no mortgage value, and you’d both lose your asset. Womp womp.

Example of mortgage repayment

Let’s say you apply and get approved for a $320,000, 30-year, fixed-rate mortgage with a 3.5% interest rate, or an APR of around 3.6% (APR also takes fees and taxes into account). In this hypothetical scenario, you’re not required to pay private mortgage insurance. 

Here is how your monthly payment might be broken down: 

Principal and interest: $1,437
Property taxes: $300
Homeowners insurance: $120

 


Total monthly payment: $1,857

When you begin paying off your mortgage, it begins to amortize. Amortization is how lenders divide a borrower’s monthly mortgage payment to slowly pay down the interest and principal loan amounts. 

For example, towards the beginning of a 30-year loan, borrowers might be paying more towards the interest and less towards the principal, while at the end of the 30-year loan, monthly payments will be almost exclusively principal payments. 

Borrowers can get a better understanding of how their loan repayments are being used by taking a look at the amortization schedule, provided by their lender. 

Over the 30-year lifetime of your loan, you’ll pay a total of: 

Loan principal: $320,000 
Interest: $197,320
Property taxes: $108,000
Homeowners insurance: $43,200

 


Total amount: $668,520

 

 

 

Please Note: These definitions don’t alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade. They are intended for educational purposes only - they’re not meant to be used in lieu of professional legal or financial advice. We’ll do our best to keep them updated, but they may not always reflect current industry developments. Feel free to use the terms with attribution (friends don’t let friends plagiarize!)

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