1. What is Principal Reduction?

Principal reduction is the portion of your loan payment that actually goes toward paying down the original loan amount (principal) rather than paying interest. It's a key factor in building equity in your home.

2. How Does the Calculator Work?

The calculator uses the simple formula:

Where:

• \( Payment \) — Your total loan payment amount
• \( Interest \) — The interest portion of that payment

Explanation: The difference between your total payment and the interest portion shows how much is actually reducing your loan balance.

3. Importance of Principal Reduction

Details: Understanding principal reduction helps you see how much of each payment builds your equity. Early in a loan term, most payments go toward interest, but over time, more goes toward principal.

4. Using the Calculator

Tips: Enter your total payment amount and the interest portion (usually shown on your loan statement). Both values must be positive numbers, and payment must be greater than interest.

5. Frequently Asked Questions (FAQ)

Q1: Why is my principal reduction so small at first?
A: In the early years of a loan, most payments go toward interest due to amortization. The principal portion increases with each payment.

Q2: How can I increase my principal reduction?
A: Make extra payments, refinance to a shorter term, or make biweekly payments instead of monthly.

Q3: Does principal reduction change over time?
A: Yes, with each payment, more goes toward principal and less toward interest (assuming fixed-rate loan).

Q4: Is principal reduction tax deductible?
A: No, only the interest portion of mortgage payments is typically tax deductible (consult a tax professional).

Q5: How does this relate to amortization schedules?
A: An amortization schedule shows how each payment is split between interest and principal over the life of the loan.