Principal denotes an amount of money you invest, the face amount of a bond, or the balance you owe on a debt, distinct from the finance charges you pay to borrow. A principal is also a person for whom a broker carries out a trade, or a person who executes a trade on his or her own behalf. But broadly speaking, in a mortgage, principal denotes the sum of money borrowed by the mortgagor from the mortgagee against a property or asset. It also denotes the face value of a debt security or a part of the total borrowed amount that is still outstanding. For instance, if you have borrowed a sum of $200,000 against your home or any other real estate, the principal amount in the loan will be considered as $200,000. In brief, principal is the face value of a debt - the sum borrowed or lent by an individual.
However, the principal amount will be accompanied with an interest as the lender will charge for his services or for allowing you to use his or her money. This fee is basically calculated as a percentage of the borrowed amount on a yearly basis, but paid monthly, semi-monthly, bi-weekly or weekly. When you make a monthly repayment, a part of it is towards the principal, while the remaining is the interest on the principal amount. Usually, during the initial stages of paying the mortgage, most part of your monthly payment comprises interest and only a little of it is towards the principal amount.
In addition, principal also denotes face value when the small amount of money is given by a person to a debtor against a security. In the instance of an equity security, the face value is usually a very small sum that has no relation whatsoever with the security's prevalent price in the market. Nevertheless, in the instance of a favourite stock or portfolio, the principal or face value is used to work out the payment of dividend or bonus. On the other hand, in the case of debt security, the face value or principal relates to bonds or shares. Here it is equivalent to the sum reimbursed to the investor or depositor when a bond is developed.
