Principal
Definition and meaning of Principal in real estate.
Principal is the original amount of money borrowed on a loan, or the remaining balance of that loan, excluding interest and other fees. It represents the actual debt owed to the lender, which decreases as payments are made over time.
In more detail
When a home buyer secures a mortgage, the principal is the face value of the loan used to purchase the property. Monthly mortgage payments are typically split between interest, which is the lender's fee for borrowing, and the principal. In the early years of an amortizing mortgage, a larger portion of the payment goes toward interest, while later payments pay down more principal.
Reducing the principal balance increases the homeowner's equity, which is the portion of the home they truly own.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Initial value | The original loan amount borrowed |
| Impact on equity | Paying down principal increases home equity |
| Monthly payment split | Divided between principal and interest |
A home buyer takes out a mortgage loan to purchase a townhouse. The initial principal of the loan is the amount they borrowed, and as they make their monthly payments, that balance slowly decreases.
Frequently asked questions
How does paying extra principal affect a mortgage?
Making extra payments directly toward the principal reduces the total interest owed and shortens the overall repayment term of the loan.
Is the principal payment tax-deductible?
No, only the mortgage interest portion of your payments may be tax-deductible; principal payments are not.
Related terms
Sources & references
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