Many homeowners face financial difficulties and find themselves unable to pay their mortgage. The principal reduction (PR) option was available to homeowners who had negative equity (owing more on their home than it was worth). In this section, we’ll go over PR, the principal reduction calculator, mortgage principal reduction at closing, and mortgage calculator in greater detail, as well as its history. Since PR programs are no longer available, we’ll discuss alternatives if you have negative equity or are having difficulty paying your mortgage.
What Is A Principal Reduction
A principal reduction (PR) is a reduction in the amount owed on a loan, most often a mortgage. As an alternative to foreclosure, a lender may grant a principal reduction to provide financial relief to a borrower. Principal reductions were relatively common in the years immediately following the 2008 financial crisis when many homeowners across the country discovered that they owed more on their homes than they were worth in a down market.
Understanding Principal Reduction
Foreclosure is a devastating experience for a homeowner, but it is also costly for a bank. Many homes sat vacant for years following the 2008-2009 housing market collapse. The government-sponsored Home Affordable Modification Program (HAMP) was put in place to alleviate the problem, keep more people in their homes, and prop up the mortgage industry. The program financed loan modifications that reduced loan principal, reduced interest rates, or extended loan terms to bring them in line with the homeowners’ ability to pay. The program came to an end in 2016.
The Subprime Mortgage Crisis Vs Principal Reductions
Principal reductions resulted from the 2008-2009 financial crisis, which was largely caused by the subprime mortgage housing bubble. These mortgages were dubbed “subprime” because they were made available to borrowers with poor credit. As a result, many people found themselves in over their heads in homes they couldn’t afford.
The growing real estate bubble burst as people began to default on their mortgages. Housing prices have plummeted, leaving many people in negative equity. In response, the United States government established the Home Affordable Modification Program (HAMP), as well as other PR programs.
Principal Reduction Calculator
Loans are typically repaid in EMIs or equated monthly installments. The EMI that you pay depends on the outstanding balance that you have. The outstanding principal on your loan will obviously decrease as you pay it off, and interest will be charged on the remaining balance. Different lending companies will calculate the outstanding principal over different time periods.
There are numerous online PR calculator (s) available to help you calculate your monthly reducing balance. All you have to do is enter information like the interest rate (percent), loan amount (in years), and whether the reducing balance is based on daily, monthly, or annual rests.
Mortgage Principal Reduction
Mortgage principal reduction loan modifications are becoming more common. Banks and lenders are modifying more mortgages, and as part of that process; they are forgiving or deferring principal on the entire amount owed on the home loan. Both regional and national lenders continue to see positive results from mortgage principal reduction programs; they see these programs as an effective way to slow down and prevent future foreclosures.
Many experts, including consumer mortgage loan advocates and housing counselors; maintain that the best way to assist struggling homeowners is to reduce the principal balance on their loans. They claim that it is more effective than lower interest rates or fee waivers. This approach would have been unthinkable a year ago, or even a few months ago.
How Many Mortgage Principals Have Been Reduced?
The federal government does provide data, and they report on it. Loan modifications that included mortgage principal reductions or write-offs as part of the process increased from 3.1 percent in the first quarter of 2009 to more than 10 percent in the second quarter of last year, according to data from the Office of the Comptroller of the Currency. From there, the percentage has risen steadily. Also, the percentage of loan and mortgage modifications involving principal reduction increased to nearly 13 percent in the third quarter of last year. You may wonder why a bank would provide this service. Not only does data show that providing this type of assistance will reduce the number of foreclosures, but another important reason is psychological.
Mortgage Principal Reduction From Citi
Citi, another major lender, has streamlined and improved its existing loan modification program, as well as increased the number of mortgages and home loans with PR. They attempted to replicate the FDIC/IndyMac model, which is an aggressive approach to reworking delinquent loans and assisting struggling homeowners. Furthermore, the majority of the assistance they are providing is part of the Citi Homeowner Assistance program.
The mortgage principal reduction program employs a simple and effective formula to calculate an affordable payment for the homeowner based; on a percentage of the borrower’s gross income. Citi will then reduce the monthly payment on that mortgage to that amount once they have that amount. And, increasingly, these reductions include principal forgiveness in addition to interest rate reductions.
Principal Reduction at Closing
This guide explains how to disclose a principal reduction on the Mortgage Flex Closing Disclosure. A principal reduction that occurs immediately or shortly after closing is disclosed in the summaries of transactions table on the standard ‘Closing Disclosure’ (purchases) or in the ‘Payoffs and Payments table’ on the alternative ‘Closing Disclosure’ (refinance/construction loan).
The following elements are included in the disclosure of a principal reduction under TRID:
- The principal reduction amount;
- The phrase “PR” or a phrase similar to it;
- The phrase “Paid Outside of Closing” or “P.O.C.” and the name of the party making the payment, if applicable to the transaction.
How to Add a Principal Reduction at closing
To access the closing disclosure, go to the closing disclosure screen or the variance screen and click on the ‘CD details’ button:
- Select ‘Payoffs/Payments’ from the dropdown menu when you click on the CD Details button:
- Click the ‘Add Item’ button to add a new item.
- Choose ‘Miscellaneous’ as the type and then click the green checkmark button.
- In the description field, type ‘Principal Reduction.’
- Fill in the amount field with the amount of the principal reduction.
- Select ‘Yes’ to the save prompt by clicking the green checkmark button.
- To save, click the blue floppy disc icon.
- To exit the screen, press the red X.
The Principal Reduction will appear in this format on the Closing Disclosure.
Mortgage Principal Reduction Calculator
Adding an extra amount to your monthly payments is one way to pay off your mortgage faster. But how much more should you be willing to pay? The early mortgage principal reduction payoff calculator from NerdWallet does the math for you. Fill in the blanks with information about your mortgage, then enter the number of years you want to pay it off. The mortgage principal reduction calculator not only tells you how much more to pay each month to pay down your principal faster, but it also shows you how much interest you’ll save.
What the Early Mortgage Principal Reduction Calculator Does
Do you want to pay off your mortgage as soon as possible? Perhaps you have 27 years left on your mortgage but would prefer to pay it off in 18 years. The early payoff calculator shows you how to achieve your goal.
The mortgage principal reduction calculator displays the following information:
- How much more principal you’d have to pay each month to pay off the loan in a certain number of years.
- How much interest would you save if you paid off the loan early?
There are numerous reasons why you might want to accelerate mortgage repayment, but the motivation usually boils down to one or both of the following:
- You want to own your home free and clear by a life event, such as retirement or the start or end of your children’s college years.
- You want to lower the total interest you pay over the loan’s life.
To consistently pay off the mortgage early, you must know how much more you must pay toward the principal balance each month to achieve that goal. You can do so with the help of this mortgage principal reduction calculator.
When paying down the principal on a mortgage faster, keep in mind that each servicer has its own procedures in place to ensure that your extra payments are applied to the principal balance rather than future payments. For more information, contact your service provider.
Conclusion
The principal reduction was a tool used to assist homeowners who were underwater on their mortgage and struggling to make payments as a result of the subprime mortgage crisis in 2008. HAMP and the HHF, the two major federal programs, have since ended. While these programs are no longer available, there are still many options available to homeowners; who have negative equity or are having difficulty paying their mortgage. If you’re having trouble making your mortgage payments on time, look into mortgage payment reduction strategies.
Principal Reduction FAQs
What causes a principal reduction?
A principal reduction may be applied if the lender’s credit exceeds the closing costs. The maximum amount is $2,000, or the best rate lock available (as verified by secondary), whichever is greater. The Lender’s credit and/or third-party credit (s) may never be used to pay off debts, delinquent charges, late fees, liens, or payoffs.
What is principal reduction at closing?
A Principal Reduction is set up as an offsetting charge on the Closing Disclosure to match the amount required. Because it is marked as a charge to the borrower, the “Cash from Borrower” increases by that amount, and the borrower may need to bring additional funds to the closing.
How much is principal reduction?
The program reduces the principal – the amount owed on the mortgage – as well as the monthly payment. In fact, the average homeowner who was approved for the Principal Reduction Program saw a $258 reduction in monthly mortgage payments, from $1,400 to $1,142.
Is principal reduction taxable?
To encourage prepayment, many mortgage lenders offer borrowers a principal reduction on their mortgage. This principal reduction is considered debt forgiveness and is taxable income to the borrower.
