What does the term principal refer to in a mortgage?

In the context of a mortgage, the term principal specifically refers to the amount of money borrowed to purchase the property. When a buyer takes out a mortgage, they receive a loan from a lender to cover part or the entire cost of the property. This loan amount is termed the principal.

As the borrower makes payments on the mortgage, a portion of each payment goes towards reducing the principal balance. Understanding this concept is crucial, as it differentiates the principal from other financial elements related to a mortgage, such as interest and closing costs. The interest rate, which is the cost of borrowing that principal, is calculated based on the principal amount but does not define it. Similarly, any fees associated with closing the loan or the total cost of the property incorporate additional components beyond just the borrowing amount, which is solely represented by the principal.