What does the term 'principal' refer to in the context of a mortgage loan?

In the context of a mortgage loan, the term 'principal' specifically refers to the original loan amount that has been borrowed and is still outstanding. This represents the base amount of money that the borrower is obligated to repay to the lender, excluding any interest that may accrue over the life of the loan.

As the borrower makes their monthly payments, a portion of each payment is applied to the principal, reducing the total amount owed. Understanding the distinction between principal and other components of a loan is crucial for borrowers as it helps them track how much of their loan is being paid down over time.

The full loan amount indicates the total amount initially borrowed, but it is not the same as the remaining principal, especially after payments have been made. The interest rate is the cost of borrowing the principal, and the monthly payment amount includes both principal and interest components, but does not solely represent what is owed on the principal itself.