What is the term for the part of a mortgage payment that reduces the loan balance?

The term for the part of a mortgage payment that reduces the loan balance is referred to as "principal." In a mortgage repayment structure, the principal represents the actual amount borrowed from the lender. When a borrower makes a monthly mortgage payment, a portion of that payment goes toward paying interest on the loan, while another portion goes directly toward reducing the outstanding balance of the principal.

As the principal balance decreases over time through these payments, the borrower pays less interest in subsequent payments, as interest is typically calculated on the outstanding principal. This process contributes to building equity in the property, which is a significant aspect of homeownership.

Understanding the role of principal in mortgage payments is crucial for borrowers, as it impacts their repayment strategy and overall financial planning.