Term Of The Day: Principal Amount

Within the context of mortgage finance, principal amount is the amount of money lent by a bank or a financial institution.

PropTiger Explains Principal Amount

The meaning of the phrase "principal amount" varies according to the context. But, generally, it is used in the context of mortgage financing. While paying off a mortgage loan, you would notice that your principal amount is often much lower than the total payment you make over the tenure period. For example, if you take a home loan of Rs 1 crore at an interest rate of 10.15% over a tenure period of 20 years, you will end up paying Rs 23,399,539. This is more than twice the principal amount. 

Home loan interest is, typically, calculated on the outstanding principal amount. The longer the loan tenure, greater the interest paid on the home loan. The principal amount will decline when you pay back the mortgage loan, over the loan tenure period. The principal amount is used as the benchmark to determine how much of the loan needs to be repaid. According to another definition of "principal amount", while paying back a home loan, "principal amount" is the percentage of the equated monthly installment that does not include the interest payment. For example, if the EMI is Rs 1,00,000, and if the interest payment is 10,000, the principal amount is Rs 90,000. 

During the loan tenure, every month, the principal amount declines when the principal amount and interest is applied against the loan. Lenders find home loans with a longer tenure period beneficial because the principal amount would remain outstanding for a longer period of time.

Check out PropGuide's comprehensive guide to real estate terms here.

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