The principal amount of the loan is the amount
you actually borrowed. In the case of a credit card, the principal
amount is the amount you actually spent. But it’s important
to keep in mind that you aren’t paying back only the
principal when the time comes to make those payments. You
must also pay the Interest - the amount added to the principal
that becomes the lender’s profit.
As you make payments on a traditional loan, the majority
of the payment amount at the beginning of the loan is applied
to interest. Typically, the amount of principal decreases
less at the beginning of the repayment period. If you plan
to make a buydown,
talk to the lender about how the money will be applied. In
some cases, you can choose to have that amount applied directly
to the principal, meaning the immediate monthly payments won’t
be impacted but the long-term returns will be significant.
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