The amount of money you originally borrow on a mortgage, before interest is added. It's what you still owe the lender at any point in time.
Principal is the actual dollar amount you owe on your loan. If you borrow $320,000 to buy a home, your starting principal is $320,000. Each month, part of your mortgage payment goes toward paying that down, and part goes toward interest.
In the early years of a mortgage, most of your payment goes to interest and only a little chips away at the principal. That balance flips later in the loan — by year 20 of a 30-year mortgage, you're knocking down principal much faster. This is called amortization, and it's why making extra principal payments early can save you thousands in interest over the life of the loan.
Example
On a $320,000 mortgage at 6.5% with a $2,022 monthly P&I payment, only about $289 of your first payment goes to principal — the other $1,733 is interest. By year 15, principal and interest are nearly equal.
Formula
New principal = Previous principal − (Payment − Interest portion)
Also known as
loan balance, outstanding balance, unpaid principal balance, UPB