is a Principal Balance Reduction?
that can affect the balance of your mortgage loan, either increasing it or
decreasing it. It is important that you
understand what these things are so that you have a better idea of where your
money is going. Let's go over the basics
first and then we will address the topic of principal balance reduction.
What is the principal and how
does it affect my loan balance?
The amount that you initially
borrow and has to repay is the principle amount. It excludes the fees and
interest amount. For example, if your mortgage loan is $200, 000 and you put
$10,000 down; your principal is the amount that is left — $190,000. However, the principal amount fluctuates
depending on the nature of your loan package
Fixing predatory lending
Principal balance reductions are
rare and usually only done by the lender.
These reductions are used to deal with predatory lending. Since predatory lending is difficult to pinpoint
before the deal is finished, the situations usually arise when borrowers have
realized that something is not right.
The immediate fix to the situation is for the lender to try to repair
the problem so that the borrower does not lose their home for something that
was not their fault. The result is
usually a principal balance reduction.
Reduction vs. tolerance
There are two very similar and
confusing term that are related to your principal balance: principal reduction
and principal forbearance. Principal
reduction is when the lender actually permanently reduces the amount of
principal that you owe. Principal
forbearance is more complicated.
Principal forbearance is more
like a temporary reduction. You receive
a principal reduction but only for a short period. You will still owe the amount that was
reduced. It will eventually have to be
The goal of principal balance
The objective of principal
balance reduction is to allow the borrower to pay in smaller and affordable
payments. The lenders generally go with
principal balance reduction when homeowner is in danger of foreclosure or has
defaulted on two or more payments.
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