Principal

In depth

Principal is the actual money borrowed in a real estate loan. Each monthly payment in an amortizing loan is divided between principal and interest, with the principal portion increasing over time as the balance shrinks. Misconception: not every payment reduces principal; interest-only periods, negative amortization, and balloon structures can leave principal unchanged or growing. Practically, in seller-financed deals, the parties should receive an annual amortization schedule showing principal reductions. The seller's IRS reporting depends on accurate tracking of principal repayments versus interest received. Buyers building equity through principal payments should request a reduction in principal acknowledgment letter periodically. A balloon payment at maturity often equals the remaining principal balance after years of partial amortization.