Definition
Principal
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The principal of a housing loan refers to the original loan amount that was borrowed by a borrower.
This is important to understand as monthly home loan repayments consist of interest charges and principal.
For example, a $1,000 payment might be made up of $400 interest and $600 hundred principal. This is why is you add up all the scheduled payments of a mortgage to it’s entirety, you would find that the total money you eventually pay would easily be about 130% of the original loan amount that was financed.
This also means that should you decide to fully repay a loan, the amount that you owe would be the principal balance plus a little outstanding interest for the following month.
This means that if the total payments which would be made if you held onto the mortgage to it’s entirety is $100,000 the amount you need to fork out today to redeem the loan could very well be $70,000, enabling you to save $30,000 in total interest charges over the years ahead.
The above is of course, an over-simplified example.
The loan principal is a very basic component of housing loans. And any borrower should understand what it is when signing up for a loan.
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