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What is a Principal Balance?
For many prospective homebuyers, mortgage terms can be overwhelming and confusing. That’s why it’s important to know some of the more basic terms your mortgage lender uses and what they mean
One of the first terms you should learn about when researching Kansas City home loans is principal balance. The principal balance on a home mortgage is the outstanding balance due on the original Kansas City home loan amount you borrowed from your lender.
Interest & Your Principal Balance
Interest and principal balance goes hand-in-hand. A fully amortizing mortgage allows borrowers to pay down their mortgage and interest with a portion of each monthly payment. More interest will be charged in the beginning of the loan because that is when the principal is at its highest.
Mortgage payments are typically spread over a long period of time—generally 25 to 30 years. Interest-only mortgages or loans with a negative amortization schedule will only require they interest to be paid. As such, the principal will not be reduced each month and the money will be added back to the principal amount, extending the life of the loan.
Reducing Your Principal Balance
There are ways to reduce your principal balance besides making your monthly Kansas City home loan payments on time, including:
- Making additional payments
For some home loans, making one additional monthly payment each year may reduce your principal balance enough so that you are able to pay off your Kansas City home loan earlier. It can also save homeowners thousands of dollars in interest over the life of the loan.
Prepaying your Kansas City home loan can also drastically decrease the amount of interest you will pay, as well as the amount of years until you can pay it off. If your loan program allows, prepayment can be done each year or every few years.