In mortgage lending, what does the term "principal" refer to?

In mortgage lending, the term "principal" refers to the original amount of money borrowed when a loan is taken out. This is the sum upon which interest is calculated and represents the outstanding balance that the borrower is obligated to repay to the lender.

Understanding principal is crucial for borrowers as it dictates the total amount that will accrue interest over the life of the loan. For example, if a borrower takes out a mortgage for $200,000, that $200,000 is the principal. As the borrower makes payments, this principal amount gradually decreases, while the interest is calculated based on the remaining balance.

The other concepts related to mortgage lending, such as the total interest paid, the amount of the loan that is payed down with each installment, and profits from the sale of a property, are separate from what "principal" specifically refers to in this context. Therefore, identifying the correct definition of principal is fundamental in understanding the overall dynamics of mortgage financing.