A Principal Reduction can be considered a borrower payment towards the principal at the closing. The Principal Reduction Modification is a temporary offering, designed to help seriously delinquent, underwater borrowers who are most at risk of foreclosure, mainly in neighborhoods that were hit the hardest by the housing crisis. How do principal reductions work?
A principal reduction occurs when a lender cuts the amount that a borrower owes on a home to something more affordable. Doe, who is going through a financial hardship, cannot pay his current monthly mortgage amount and is approved for a principal reduction by his lender.
Once you know how much interest you have to pay, you can figure out the principal reduction amount. Subtract the monthly interest from the monthly payment for the monthly principal reduction. Alternatively, subtract the annual interest from the annual payment for the annual principal reduction. A Principal Reduction is set up as an offsetting charge on the Closing Disclosure to match the amount required.
Once the loan is set up for servicing, a statement will be sent to the borrower that reflects the lower principal balance. If a borrower chooses to exercise their deferred interest rights and pay the lower balance, then the payment will cover the principal and some interest. The excess interest is then added to the total balance of the loan. Deferred Principal Balance means, as of any date of determination, the aggregate principal amount of the Term Loans required to be paid in accordance with Section 2.
A principal reduction reduces the amount owed on a mortgage to help a distressed homeowner make payments. That means fewer dollars owed and more money in your pocket. The path that borrowers could take is determined by those who own the loans, also known as the investors. Though absent from negotiations, they have spelled out very clearly in servicing contracts whether they will entertain principal reductions.
Preferences vary. In some cases, private investors go for the term extension first. If the principal reduction is done in connection with the federal mortgage-aid program, HAMP, then the borrower will likely see an interest-rate cut, assuming the borrower successfully completes trial payments.
Other times, investors attempt a trial-and-error process in which a principal reduction is considered first to bring down the mortgage payment to an affordable level. The third borrower, Donna Marvel of the City Heights are of San Diego, received only a principal reduction with no other changes.
Marisabel Garcia of Oak Park has supported two kids and a mortgage on one income following a divorce. Her financial worries worsened after a series of home repairs surfaced: a broken front door, a faulty heater and electrical wiring that was acting up. After hearing about the Keep Your Home California program on Spanish radio, Garcia, 47, immediately applied to improve her chances of keeping her home.
As part of the program, a lien is placed on the home and is forgiven in five years if the borrower is in good standing. The last estimate from DataQuick showed that more than one in three homes with a mortgage in San Diego County is underwater. The reality of lost equity continues to push borrowers toward strategic defaults, in which homeowners decide to stop paying the mortgage.
Others like Kurt Branstetter, loan officer and mortgage manager at W. Bradley Mortgage in San Diego, say principal cuts are not the answer. Regardless of your position, more principal reductions are expected to happen in the nation, especially in the hard-hit state of California.
Keep Your Home California, the state program, no longer requires servicers to match program money dollar-for-dollar in order for a principal reduction to happen, a change that program officials hope will lure more servicers to the table. Related : More mortgage reductions in California? Another recent change that could drastically increase borrower participation is that struggling homeowners with mortgages owned by one of the mortgage giants, Fannie Mae and Freddie Mac, may have a shot at a home-loan reduction.
Mary Gallagher runs Mary Gallagher Planning mgaplanning. She is the former assistant planning director for San Francisco and planning director for San Mateo. Gallagher has been writing about real estate, development and land use for numerous websites since She holds a master's degree in historic preservation planning from Cornell University.
By Mary Gallagher. Related Articles. Biweekly Payment Plan Many lenders offer a biweekly mortgage payment plan. Small Extra Amount Each Month You do not need your lender to set up a principal-reduction program for you.
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