What does Principal deferral mean when you are asking mortgage lender for a loan modification?

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  1. Reply
    February 16, 2011 at 9:39 pm

    Normally mortgage payments are allocated to both interest and principal. Principal deferral means that you would only be paying interest. If you only pay interest, the loan will go on forever. If you pay interest plus a reduced amount of principal, the loan will last longer than originally planned.

  2. Reply
    February 16, 2011 at 10:28 pm

    “Principal deferral” sounds like fast talking mortgage speak for “interest only”. This means you are only paying interest, and not paying down principal – this gives you a lower payment but does not give you any equity. Be careful here – research your options before choosing one lender. There are a lot of guys taking advantage of the bad situation that many folks are in right now. You can find reputable lenders at http://mortgage-rates.ratenerd.com/. Good Luck!

  3. Reply
    February 16, 2011 at 10:37 pm

    Hi, that is an excellent question. I don’t know for sure but, what it sounds like is that the bank would be adding the monthly principal payment you would have normally made back into the loan, essentially increasing the outstanding balance. If that is the case it is not the best outcome for you because it will ultimately mean that you will be paying a higher level of interest over the life of the loan and potentially a higher payment later in the loan if the term stays the same. You would be better off negotiating for a reduced interest rate, reducing the balance of the loan or perhaps an interest only loan but, I would caution the interest only, it has other risks associated with it.

  4. Reply
    February 16, 2011 at 11:36 pm

    If you are asking for a mortgage for a loan modification you must be in danger of foreclosure. If the modification is the only option you were offered there probably no others. Just to be sure ask if you can get a lower interst rate or extend the term of the loan. If there are no other options you just have to decide if you want to lose your home or take the deal offered.

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