The Principal Amount refers to the original sum of money borrowed in a loan or invested, excluding any interest or dividends. When it comes to mortgages or other types of real estate financing, the principal amount is the amount of money initially borrowed to purchase the property. Over time, as payments are made towards the loan, this principal amount is reduced.
For instance, if an investor obtains a mortgage for $200,000 to purchase a property, the principal amount of that mortgage is $200,000. If the investor then pays off $50,000 of that loan, the remaining principal amount is $150,000.
It’s essential to differentiate the principal amount from interest, fees, or other charges. When monthly payments are made on a loan, typically, a portion goes toward reducing the principal, and another portion goes toward interest.