Principal amount in a mortgage loan is the initial sum to purchase a property. It’s the core amount upon which interest rates and other loan conditions are applied. Simply, it’s the actual money that you receive from the lender and have to repay.
When you take out a mortgage loan to purchase a property, the principal is the total amount of money you borrow from the lender. This amount forms the basis for calculating the interest that accrues over the life of the loan. The interest is a percentage of the outstanding principal balance that the borrower pays to the lender as part of the loan agreement.
The principal amount does not include interest or additional loan-related costs like origination fees, closing costs, or mortgage insurance premiums. However, lenders can add these extra costs to the total loan amount, thereby increasing the overall principal balance.
Over time, as you make regular mortgage payments, a portion of the payment goes towards reducing the principal balance, while another portion goes towards paying the interest. Gradually, the principal decreases, and the interest payments decrease accordingly.
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