Real Estate Finance
The two components of a standard mortgage payment — principal reduces the loan balance; interest is the cost of borrowing.
Each mortgage payment consists of principal (the portion that reduces the outstanding loan balance) and interest (the charge for using the lender's money). In a fully amortized loan, the total monthly payment stays the same, but the ratio shifts over time: early payments are mostly interest, while later payments are mostly principal. Some loan programs require interest-only payments for an initial period, meaning the principal balance does not decrease during that time.
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