Principal Reduction

Posted in Finance, Accounting and Economics Terms, Total Reads: 81
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Definition: Principal Reduction

Principal Reduction is a monetary reduction provided to the home owners on their principal amount which is to be paid by them on their mortgage loan. Such aid is provided to those home owners whose asset value goes below their principal amount to be paid on their loan.

This  prevents the homeowners to default on their fixed interval principal and interest payments as the new value of payment becomes affordable to them as their principal amount is reduced which brings down the interest payment too.

These reductions process are undertaken by government firms which checks the eligibility of the applicants on various factors:

  • Citizen of that respective country
  • Resident of that particular area where the firm is eligible to pay for.
  • Property comes under the area for which the firm is eligible to pay for
  • Loan value should be greater than asset value by certain percentage.
  • Amount to be reduced to sustain the loan payment by the borrower.
  • Household income of the owner.
  • Reason for the financial trouble faced by the owner

Such services are specially provided to low and moderate income house owners so that they can sustain their loan payments as per their income.

Such can occur during the recession period when the asset value decreases to a huge extent and their market value of asset becomes negative compared to its book value. This causes their liabilities to be more than their assets. So in that case government firms come forward to help their citizens from defaulting on their loans and prevent the chain of defaults which may lead to recession in the whole country.

Such firms has been setup in Florida and California regions of the U.S. to protect its residents from defaulting on loans and restructure their loans under “Principal Reduction Programme”.

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