In real estate finance, what does ‘principal’ refer to?

In real estate finance, ‘principal’ refers to the original amount borrowed or the remaining balance owed on a loan. This is a critical concept because the principal is the foundation of any mortgage or loan agreement; it is the sum that the lender provides to the borrower. Interest is calculated based on the principal amount, meaning that as the principal decreases through payments, the interest expense will also decrease over time. Understanding this distinction helps borrowers manage their loan payments effectively while also considering how various factors, such as payment schedules and interest rates, will affect their overall financial obligation. Recognizing principal as separate from other components of a loan, such as fees or interest rates, is essential for comprehending the total cost of borrowing in real estate transactions.