In real estate financing, what does the term principal mean?

In real estate financing, what does the term principal mean?

• A. The total amount of money paid including interest
• B. The original sum of money borrowed, excluding interest
• C. The payment made for property taxes
• D. The value of the property at the time of sale

Answer: (B)

In real estate financing, the term "principal" specifically refers to the original sum of money that is borrowed, excluding any interest. This is the amount that the borrower is obligated to repay to the lender over the life of the loan. Understanding principal is crucial as it serves as the foundation for calculating interest charges on the loan, which are typically expressed as a percentage of the principal. When borrowers make their monthly mortgage payments, a portion goes towards paying down the principal, while the remainder covers the interest on the loan. Over time, as the principal amount decreases with each payment, the interest paid also decreases, making the understanding of the principal vital for both lenders and borrowers in managing and repaying loans effectively.

In real estate financing, the term "principal" specifically refers to the original sum of money that is borrowed, excluding any interest. This is the amount that the borrower is obligated to repay to the lender over the life of the loan. Understanding principal is crucial as it serves as the foundation for calculating interest charges on the loan, which are typically expressed as a percentage of the principal.

When borrowers make their monthly mortgage payments, a portion goes towards paying down the principal, while the remainder covers the interest on the loan. Over time, as the principal amount decreases with each payment, the interest paid also decreases, making the understanding of the principal vital for both lenders and borrowers in managing and repaying loans effectively.