What must be deducted from the loan principal when calculating the amount financed for a real estate loan?

When calculating the amount financed for a real estate loan under the Truth in Lending Act (Regulation Z), it's essential to understand that this amount reflects the net amount the borrower will receive after adjustments for certain charges. One key deduction from the loan principal concerns the prepaid finance charges, which may include items like loan origination fees and points that the borrower pays upfront that are associated with the financing of the loan.

Prepaid finance charges are deducted because they represent costs that are incurred before the loan is fully disbursed to the borrower, thereby affecting the net cash available to the borrower. This is why the calculation focuses on these charges to determine the true amount financed.

While mortgage insurance premiums and title insurance premiums might also incur costs related to the loan, they do not qualify as charges that directly reduce the principal in the context of the amount financed calculation. Therefore, when determining the precise amount that will be financed for a real estate loan, only prepaid finance charges are deducted from the loan principal. This is the rationale behind selecting this specific answer.