The principal in a loan is the balance that you owe on your loan after down payments and before additional fees and interest amounts. The principal fluctuates depending on the type of loan that you have. If you have smaller payments, your principal goes up and you owe more money. If your payment amount does not go over the interest portion of the payment, your principal will get larger. In a typical mortgage payment, a portion goes to the interest and the remainder goes to the principal balance.

As with any other type of loan modification, the whole purpose of a principal balance reduction is to provide the borrower with smaller, more affordable payments. In most cases, these reductions are done when the homeowner is in danger of foreclosure or has defaulted on two or more payments. There are requirements that have to be met to receive a principal balance reduction, and you should contact your lender directly to find out what they are.