Definition
Principal & Interest (P&I) are the two primary components of a mortgage payment. The principal is the original loan amount borrowed, while the interest is the cost of borrowing the money, paid to the lender over time. Together, P&I determine the monthly mortgage payment, excluding taxes, insurance, and other costs.
Explanation
A mortgage payment is made up of several parts, but P&I is the core amount that directly affects loan repayment.
- Principal – The portion of the payment that reduces the outstanding loan balance over time. More of the payment goes toward principal as the loan matures.
- Interest – The fee charged by the lender for borrowing money, calculated as a percentage of the remaining loan balance. Interest is highest at the beginning of the loan and decreases over time.
Most home loans follow an amortization schedule, meaning that in the early years of the mortgage, the majority of each payment goes toward interest, while later payments apply more toward principal reduction.
Example
A borrower takes out a $300,000 mortgage at a 6% fixed interest rate on a 30-year term. Their monthly P&I payment is $1,799 (not including taxes and insurance).
- First few years: Payments go mostly toward interest, with little reduction in principal.
- After 15 years: The principal portion increases, reducing the loan balance faster.
- At 30 years: The loan is fully paid off, with most payments in the later years going toward principal.