Amortization

Principal

Principal is the original amount of money you borrow for your mortgage, not including interest. Each monthly payment reduces your principal balance, which in turn reduces the amount of interest charged in the following month. As you pay down the principal over time, you build equity in your home. On a $400,000 mortgage, the entire $400,000 is the principal, and the total amount you repay over the life of the loan will be the principal plus all accumulated interest.

Interest Rate

The interest rate is the cost of borrowing money for your mortgage, expressed as a percentage of the loan amount charged annually. Your rate is determined by factors including your credit score, down payment, loan type, loan term, and current market conditions. Even a small difference in rate can significantly impact total cost over the life of the loan. For example, a 0.5 percent reduction on a $400,000 mortgage can save over $40,000 in interest over 30 years.

Fixed-Rate Mortgage

A fixed-rate mortgage is a home loan with an interest rate that remains the same for the entire term of the loan. This means your monthly principal and interest payment stays constant, providing predictability and protection against rising interest rates. Fixed-rate mortgages are available in various terms, with 15-year and 30-year being the most common. They are the most popular mortgage type in the United States because of the payment stability they offer.