Month: July 2023

what is principal reduction

What Is Principal Reduction in Mortgage?

Falling on hard times makes diligent mortgage repayments more challenging. In the past, homeowners with negative equity were able to access principal reduction programs. But today’s property owners need to look elsewhere.

What is principal reduction when it comes to your mortgage loan? Below, Altitude Home Loans discusses mortgages and home purchasing in Tucson, AZ. Read on, and be sure to call us if you’d like to know more.

What Is Principal Reduction?

The idea of principal reduction involves decreasing the amount someone owes on a loan, not counting the interest portion. Finding ways to reduce the principal amount ensures borrowers have an easier time repaying the loan. It also alleviates the risk of foreclosure and reduces the total interest owed over the term.

During 2008’s subprime financial crisis, the market crash meant that many homes ended up with negative equity (they were worth less than originally invested). Lenders agreed to drop the principal balances of their loans to aid distressed borrowers. This move kept people in their homes and averted the foreclosures that mortgage companies might have had to deal with.

That’s also why programs like the Hardest Hit Fund (HHF), HAMP, and Principal Reduction Modification became available.

How Principal Reduction Helped Homeowners and Banks

So, what did principal reduction do for homeowners? And why did the government and banks encourage these programs?

Foreclosures leave property owners without homes and banks financing losses. Homeowners of the past would usually take mortgages they couldn’t afford, betting on getting more money for selling their property as real estate prices increased from year to year. However, when property values decreased instead, there was a collective inability to pay, and countless homes dipped into negative equity. 

With principal reduction programs, struggling homeowners remained in these houses and tried to get back on their feet.

Two Principal Reduction Programs Examples

The main principal reduction programs were the Principal Reduction Modification Program and Home Affordable Modification Program.

  • Principal Reduction Modification. The Federal Housing Finance Agency began this program in 2016 for Fannie Mae or Freddie Mac loans. The borrowers had to owe $250,000 or less and meet several criteria.
  • Home Affordable Modification Program (HAMP). Borrowers had to show they were experiencing financial hardship. And the property could not be unlivable or condemned. This program ended in 2016.

What to Do If You’re Struggling to Pay Your Mortgage

While previous principal reduction programs are no longer an option, it isn’t only loan forgiveness that potentially reduces how much you have to pay back. Some property owners are able to pay their mortgages off early. If that’s not you, looking into ways to reduce your mortgage payment or get help with your mortgage is still essential.

Why not ask for a loan modification or loan forbearance for a short period? Refinancing can also lower monthly repayments.

Learn More About Mortgage Assistance

What is principal reduction able to achieve for today’s homeowners? Altitude Home Loans would love to tell you more about it. We have extensive knowledge about how inflation affects housing prices, home refinancing, mortgages, and more, so call 520-500-1010 today for more information!


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