Principal in Real Estate
Definition
The term “Principal” in real estate can have multiple interpretations based on the context:
- Property User or Owner: The individual who owns or will use the property. For example, the principals to the lease are the landlord and tenant; principals to a sale are the buyer and seller.
- Client of Broker/Agent: The one who contracts for the services of an agent or broker. This individual is often referred to as a client. For instance, if a person engages a broker to arrange financing, that person is considered the principal.
- Loan Amount: The amount of money borrowed in a mortgage, distinct from the interest paid. For example, if a loan is secured for $100,000 at 6% interest, the $100,000 is the principal.
Examples
- Property Owner/User: In a residential lease, the principal parties are the landlord and the tenant.
- Client of Broker/Agent: Grey wishes to purchase a shopping center and engages Jamison, a mortgage broker, to arrange financing. Jamison arranges a loan in the name of the principal, Grey.
- Loan Amount: Abel secured a home loan with a $100,000 principal amount at 6% interest. The initial payment includes both interest and an amount that amortizes the principal.
Frequently Asked Questions (FAQs)
What does it mean to be a principal in a real estate deal?
Being a principal means being a primary party to the transaction, such as the owner, buyer, seller, landlord, or tenant. It also refers to someone who engages the services of an agent or broker for tasks like purchasing property or arranging financing.
Who are the principals when leasing a commercial property?
The principals in leasing a commercial property are the landlord (lessor) and the tenant (lessee).
How does the principal in a loan differ from the interest?
The principal is the original amount of money borrowed in a loan, while the interest is the cost of borrowing that money. The principal tends to reduce over time with scheduled payments, assuming an amortizing loan structure.
Why is it important to know the principal amount in a mortgage?
Understanding the principal amount in a mortgage is crucial because it determines the initial debt one has taken on and is essential for calculating subsequent interest payments and amortization schedules.
Related Terms
Interest
Interest is the cost paid for borrowing money, usually expressed as an annual percentage of the principal.
Amortization
Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment includes both interest and a portion of the principal.
Balloon Payment
A balloon payment is a large, one-time payment at the end of a loan period, used to pay off the remaining principal on the loan.
Client
A client is an individual or entity that hires a broker or agent for services like buying, selling, or financing a property.
Online Resources
- Investopedia – Principal Definition: Link
- IRS – Mortgage Interest Deduction: Link
- Consumer Financial Protection Bureau – Understanding Amortization: Link
References
- Real Estate Principles, Charles J. Jacobus
- Modern Real Estate Practice, Fillmore W. Galaty, Wellington J. Allaway, Robert C. Kyle
- Fundamentals of Real Estate, David C. Ling, Wayne R. Archer
Suggested Books for Further Study
- Real Estate Finance & Investments by William B. Brueggeman and Jeffrey D. Fisher
- The Simple Path to Wealth: Your road map to financial independence and a rich, free life by JL Collins
- Residential Mortgage Lending: Principles and Practices by James J. Lacko
Real Estate Basics: Principal Fundamentals Quiz
### Which of the following best describes 'principal' in the context of a loan?
- [x] The original amount of money borrowed.
- [ ] The total amount of interest paid.
- [ ] The total amount of monthly payments.
- [ ] The closing costs associated with the loan.
> **Explanation:** The principal is the original amount of money borrowed, excluding interest and other fees.
### Who are considered the principals in a lease agreement?
- [x] Landlord and Tenant.
- [ ] Broker and Agent.
- [ ] Buyer and Seller.
- [ ] Insurance Agent and Client.
> **Explanation:** In a lease agreement, the principals are the landlord (lessor) and the tenant (lessee).
### If a loan principal is $150,000 at an interest rate of 5%, how much of the principal will be repaid in the first payment of an amortizing loan?
- [ ] All $150,000.
- [x] A portion, with the rest going toward interest.
- [ ] None, all will go toward interest.
- [ ] The loan amount plus fees.
> **Explanation:** In an amortizing loan, a portion of each payment goes towards repaying the principal and a portion toward the interest.
### In real estate, what term describes the individual who engages the services of an agent or broker?
- [x] Principal.
- [ ] Lessor.
- [ ] Amortizer.
- [ ] Tenant.
> **Explanation:** The individual who contracts for the services of an agent or broker is referred to as the principal.
### Which term refers to a large one-time payment that settles the remaining principal at the end of a loan term?
- [ ] Amortization.
- [ ] Interest.
- [ ] Equity.
- [x] Balloon Payment.
> **Explanation:** A balloon payment refers to a large, final payment at the end of a loan term to settle any remaining principal.
### Who pays the interest in a mortgage transaction?
- [x] The borrower/principal.
- [ ] The lender/broker.
- [ ] The government.
- [ ] The real estate agent.
> **Explanation:** The borrower, who is the principal in the loan, pays the interest to the lender.
### How does understanding principal help in financial planning for a mortgage?
- [ ] It helps calculate property taxes.
- [x] It helps determine payment schedules and financial obligations.
- [ ] It helps select the paint color for the house.
- [ ] It helps adjust the property insurance premiums.
> **Explanation:** Understanding the principal amount helps determine payment schedules, interest paid over time, and overall financial obligations.
### What type of payment schedule reduces both the interest and principal over time?
- [ ] Simple interest schedule.
- [x] Amortization schedule.
- [ ] Only interest payments.
- [ ] Lump-sum payment.
> **Explanation:** An amortization schedule reduces both the interest and principal over time with regular payments.
### If a mortgage is for $200,000 at 4% interest, how much does the principal amount affect the total amount of interest paid?
- [x] Significantly, as interest is calculated based on the principal.
- [ ] Insignificantly, interest is independent.
- [ ] It doesn’t affect interest at all.
- [ ] The interest rate will remain fixed irrespective of the principal amount.
> **Explanation:** The total interest paid is calculated based on the principal amount, making it a significant factor.
### Can a principal be a corporate entity in a real estate transaction?
- [x] Yes, corporate entities can be principals.
- [ ] No, only individuals can be principals.
- [ ] Only agents and brokers can be principals.
- [ ] Principals must be government bodies.
> **Explanation:** Corporate entities can indeed act as principals in real estate transactions.
