Principal vs Principle: What is the difference between a mortgage principal and a principle? Both terms are very similar in spelling and pronunciation. Actually, they are homophones.
I wouldn’t blame you if you have used the “principal” and “principle” interchangeably in the past, because of their similarities, but doing that again after reading this would make you guilty of a grammar murder.
As a loan officer, first-time homebuyer, mortgage broker, mortgage lender, or a real estate agent, you need to know the difference between Principal vs Principle and be aware that “principal” and “principle” are two different words
Both terms are used wrongly by newbies in the housing industry, but if you have been working in major mortgage companies and yet you don’t know this, then you really need to go through this Principal vs Principle guide.
Principal vs Principle: It’s Mortgage Principal, Not Principle
A principal is an adjective for main or primary
In the same stream, the principal is a noun for the headmaster of a school or institution.
Ideally, the principal of a school is the school’s number one person.
On the other hand, a principle is a noun that means a law, rule, tenet, doctrine, or basic truth.
The principle refers to your belief and thought system. You agree on a principle and not a principal.
For instance, if someone says, “I am a person of principles”. It means that he or she has some beliefs which are rigid and cannot be easily compromised.
Another instance is when a principle is used in scientific terms.; such as Bernoulli’s Principle. Here it applies to rules and laws that have been established from the laws of nature.
Principal vs Principle: Can principle be used in home loans?
Not really, but an investment banker may say, “I don’t wish to invest with their company, the lending system goes against my principles”.
The principle here becomes a matter of expression and a person’s culture. However, it does not apply typically in the financial sector, but to ‘individuals’ in the industry.
Principal vs Principle: What Does a Principal on a Mortgage Mean?
Principal as a loan term is the larger amount of the money to be borrowed, or the sum to be paid for a mortgage loan. You earn more equity on your house as you pay off this mortgage principal.
The principal balance is the remaining money from the borrowed or lent money, which declines as the monthly mortgage payments are made.
Does this mean that a principal is the same as a mortgage? The answer is “No”. Both are relative because the monthly mortgage payment consists of the principal and interest, and sometimes property taxes and insurance.
For instance, if the mortgage loan you want to take is tagged at $100,000; then, $100,000 is your principal amount.
Where it seems confusing is that on paying back the loan amount, you would not only pay $100,000 but also an additional cost known as the interest rate.
The principal is the larger amount to be paid while the interest is the rate you pay for borrowing the money.
The interest rate maybe 3% of the principal. That gives us 3% of $100,000 which is $3,000.
So your total mortgage payment becomes $103,000, that is if it’s a fixed mortgage. The monthly mortgage payment you would be making can then be sectioned from this amount.
An Escrow impound account is needed for you to pay taxes and homeowners insurance.
Initially, much of your mortgage payments each month would go towards interest, but with each passing month, the principal balance of the mortgage falls.
To quickly pay up your mortgage balance, you can make extra principal payments. In this way, more payments go to sort out your principal even as your interest is paid for the month.
Well, is it smart to pay extra principal on a mortgage? The answer to this would Ultimately be a “Yes”, you do not want to stash up your principal and only focus on your interest. This is because the interest you have to pay would keep compounding until you have settled out all of your principal balance.
These extra payments towards the principal balance are called “prepayments.” On an estimate, making one additional monthly payment each year can cut down the loan term by five years.
You would often have to contact your mortgage lender or loan servicer on how to partition the additional amount so that it can be properly applied.
Principal vs Principle: The difference between your remaining principal balance and your current appraised value (the principal amount you have paid so far) is your home equity.
What happens when you pay off the principal on a mortgage? You gain full home equity of your house when you have paid off all outstanding balances on your mortgage.
If you want to purchase or refinance a home, knowing that principle, principal, and even the mortgage loan are not the same words would keep you at the smarter edge with your mortgage broker or lender.
Unfortunately, if your mortgage company and real estate are constantly making this mistake, then you should be wary of such transactions.
All mortgage professionals who aced their major papers while in school have most of the mortgage terms handy; especially the ones directed at money.
Conclusion: Principal Vs. Principle
For home loans and mortgages generally, the term you are referring to would be “Principal”. Luckily, since both terms are often mistaken, your bank would still understand you even if you use “Principle”.
With the help of this article, Principal vs Principle, knowing that it’s mortgage principal and not principle would help you find out how long it will take before you finally own your home.
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