Principal refers to the amount of money initially borrowed in a loan, excluding interest and other fees. It is the base amount on which interest payments and amortization schedules are calculated.
Category/Context: The term principal is most relevant in the context of real estate financing and mortgage lending.
Related Terms
- Interest
- Amortization
- Loan-to-Value Ratio (LTV)
- Mortgage
- Equity
Usage Example(s)
When a borrower makes a mortgage payment, a portion of the payment goes towards reducing the principal, while the rest is applied to interest charges.
Examples/Applications
For example, if a homebuyer obtains a mortgage loan of $200,000 to purchase a property, the principal is the initial $200,000 borrowed. As the borrower makes monthly payments, the principal will gradually decrease until the loan is paid off in full.
Etymology/History
The term principal has its roots in Latin, from the word “princeps,” which means “first” or “chief.” In the context of loans, it refers to the initial amount borrowed, which is the chief or primary component of the debt obligation.
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