Definition:
The original principal balance is the total amount of money borrowed through a mortgage loan at the time it is first issued, not including interest. It’s the starting point for the loan repayment schedule.
Example:
When Lisa buys her home, she takes out a mortgage loan for $300,000. This amount is her original principal balance. Over time, as she makes monthly payments, the balance goes down.
Explanation:
The original principal balance is one of the key figures in a mortgage loan. It is the full loan amount agreed upon between the borrower and the lender before any payments are made. This balance is used to calculate the borrower’s monthly principal and interest payments and is the amount the borrower agrees to repay over the life of the loan.
It is important to note that:
- This amount does not include interest, taxes, insurance, or fees.
- As payments are made, part goes toward interest, and part goes toward reducing the principal.
- Over time, as the principal is reduced, less interest accrues, and more of the monthly payment goes toward the principal (in a standard amortized loan).
The original principal balance is also useful for comparing how much of the loan has been paid off versus how much remains.
Why is the Original Principal Balance Important in Real Estate Transactions?
The original principal balance is important because it reflects the total borrowed amount and is the basis for the loan’s terms and repayment schedule. For buyers, it helps them understand their full financial obligation. For sellers, knowing the remaining loan balance versus the original principal can help determine equity in the home. It also plays a role in refinancing or selling decisions.