Principal Reduction

DEFINITION of 'Principal Reduction'

A decrease in the principal owing on a loan, typically a mortgage, for the purpose of lessening the outstanding principal balance on qualifying properties that have negative equity. Principal reduction is normally employed to prevent foreclosures on properties, which may be more costly to financial institutions than a reduced principal owed to them. As a result, principal reduction typically requires specific requirements in order for a homeowner to qualify, such as ability to commit to payments, to whom a mortgage payer owes the principal and whether the total balance owing on the mortgage is greater than the value of the property.

BREAKING DOWN 'Principal Reduction'

Typically, principal reduction programs are government-mandated, offered by firms such as Fannie Mae and Freddie Mac in order to relieve homeowners of a degree of debt-burden. Principal reduction is in essence debt relief, which counts as income on a tax return and thus is subject to tax. However, those who qualified for the Mortgage Forgiveness Debt Relief Act of 2007 were able to exclude some canceled debt on their primary residence while filling out their tax forms.

RELATED TERMS
  1. Principal

    1. The amount borrowed or the amount still owed on a loan, separate ...
  2. Reverse Mortgage Net Principal ...

    The amount of money a reverse mortgage borrower can receive from ...
  3. Mortgage Accelerator

    A type of mortgage loan program popular in the United Kingdom ...
  4. Paydown Factor

    The portion of cash subtracted each month from the principal ...
  5. Negative Amortization

    An increase in the principal balance of a loan caused by making ...
  6. Agency Theory

    A supposition that explains the relationship between principals ...
Related Articles
  1. Markets

    What Does Principal Mean?

    For banks, principal refers to the amount due on a loan, and is used to calculate interest payments.
  2. Investing

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Personal Finance

    Interest-Only Mortgages: Home Free Or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  4. Personal Finance

    Mortgage Basics: The Amortization Schedule

    By Lisa SmithThe amortization schedule for a residential mortgage is a table that provides a breakdown of the schedule of payments from the loan's first required payment to the loan's final payment. ...
  5. Investing

    Be Mortgage-Free Faster

    Getting rid of this debt faster has bigger benefits than you might think.
  6. Personal Finance

    Mortgage Basics: Costs

    By Lisa SmithPeople generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the ...
  7. Markets

    Creating a Tax-Deductible Canadian Mortgage

    Find out how to get a tax benefit from your mortgage like your neighbours to the south.
  8. Professionals

    What The Series 24 Exam Won't Teach You

    Can you handle being the judge and jury in your firm? Find out what surprising tasks a job as a principal entails.
  9. Personal Finance

    Understanding The Mortgage Payment Structure

    While a mortgageā€™s size and term set the baseline, the interest, taxes and insurance all influence the amount of the monthly payment.
  10. Retirement

    How Regulations Protect Reverse Mortgage Borrowers

    They're complex animals, which is why there are government guidelines in place to protect borrowers.
RELATED FAQS
  1. Is there any limit on how much I can pay toward my mortgage principal every month?

    I understand that I'll be paying more interest and less principal for almost the first half of my mortgage term. I'm planning ... Read Answer >>
  2. What are the responsibilities of the principal in a company?

    Learn to differentiate between some of the many definitions and responsibilities of a "principal" as it relates to business ... Read Answer >>
  3. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  4. How does the amount of the principal fluctuate depending on inflation?

    Read about the impact of inflation on your principal balances, and learn why inflation harms lenders and bondholders at the ... Read Answer >>
  5. In what situations would a loan to an S Corporation from one of its principals be ...

    Learn how creating a debt agreement is the key to ensuring a principal's loan to an S corporation is not classified as an ... Read Answer >>
  6. Is there any time I would want to have a zero-principal mortgage?

    As a general rule, entering a zero principal mortgage, or what is commonly referred to as an "interest-only mortgage", is ... Read Answer >>
Trading Center