Original Principal Balance
Definition and meaning of Original Principal Balance in real estate.
The original principal balance is the initial amount of money that a borrower agrees to pay back under the terms of a mortgage or other loan, prior to making any scheduled payments.
In more detail
This figure is locked in at the loan closing and represents the actual amount of debt incurred to purchase a property. It does not include interest, loan fees, or escrow accounts for property taxes and homeowners insurance. Lenders use this starting amount to compute the monthly payment requirements and draft the amortization schedule.
For investors and buyers, this balance is the base number used to calculate future interest savings if they choose to prepay or refinance the loan.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Determined at | Loan closing |
| Excludes | Interest and escrow fees |
| Key function | Calculates amortization schedules |
An investor buys a duplex for $400,000, provides a down payment of $80,000, and secures a mortgage for the remaining balance, which sets the original principal balance at $320,000.
Frequently asked questions
Can the original principal balance ever increase after closing?
In typical amortizing loans, the balance only decreases. However, in loans with negative amortization, unpaid interest is added back to the principal, making the outstanding balance higher than the original principal balance.
Why is the original principal balance important when refinancing?
Refinancing replaces the existing loan with a new one. The new loan will have its own original principal balance, which is usually based on the unpaid balance of the old loan plus any rolled-in closing costs.