In real estate, what does "principal" refer to?

In real estate, the term "principal" specifically refers to the original sum of money borrowed in a loan agreement. When a borrower takes out a mortgage, the principal is the amount that they initially receive from the lender, which must be repaid over time. This amount does not include interest or other fees; it solely represents the initial loan amount.

Understanding the meaning of principal is crucial for comprehending how mortgage payments are structured. Each payment typically consists of two parts: a portion that goes towards the principal and another that covers the interest on the loan. Over time, as a borrower makes payments, the principal amount decreases until it is fully paid off, while the interest is calculated on the remaining principal balance.

This concept is central to mortgage financing and real estate transactions, highlighting the significance of the principal in determining the overall cost of borrowing and in the equity build-up in a property as payments are made.