Real Estate Blog

How to: Principal Reduction Program

February 23rd, 2010 11:05 PM by Sherry Lee


Things You'll Need:

  • Current Mortgage Information
  • Current Finacial Info
  1. Step 1

    Do you owe more than your home is worth? Did you know you can reduce your principal balance to current market value with a Principal Reduction Program? Even is you have bad or no credit, behind in payments, or in foreclosure without needing to go through the hassle of a Loan Modification?
    When first hearing about Atlantic Mutual's Principal Reduction Program, most homeowners simply ask, "What is Principal Reduction all about?" Our Principal Reduction Program (Often referred to as "PRP" or "Principal Reduction Loan") In the simplest terms, It's when a bank reduces the balance on your mortgage either through a loan modification process whereby the loan stays with your existing lender, or by your lender agreeing to a "Short Refinance" in which a new lender buys your note at a discount, usually at market value. Our Principal Reduction Program is designed to help people who owe more than their house is worth. It's a "Property Relief" program for people that are "upside down" in their mortgage (negative equity), meaning the property is worth less than their current mortgage.

  2. Step 2

    Through the Principal Reduction Program, we at Atlantic Mutual work with several lenders and hedge funds to purchase your current mortgage at a discounted rate in order to replace it with a new, better mortgage. The Principal Reduction Program offers you the following benefits:
    • A new mortgage with a principal balance set at the current market value of your home
    • A fixed interest rate of prime + 3% for the 30 year term of
    your loan (currently, at 6.25%) Any loan amount qualifies
    • Primary and secondary residences can enter the program
    • Will accept first and second mortgages, along with HELOCs
    • Credit reporting of your current mortgage as "payment in full"
    • No closing costs associated with your new loan.

    A Principal Reduction Program works to lower the principal mortgage amount on your home to match the true current value.

  3. Step 3

    But, why would your bank agree to a PRP? Because your bank can now utilize U.S. Government TARP funds (Troubled Asset Relief Program) to help recoup their losses after agreeing to reduce a homeowner's mortgage amount. The Troubled Asset Relief Program (TARP) is a program of the United States created to purchase assets and equity from financial institutions to strengthen the financial sector; it is the largest component of the government's measures in 2008 to address the subprime mortgage crisis.

  4. Step 4

    Our Principal Reduction Program is similar to the popular "Cash for Clunkers" automobile program in the sense that it was designed to help boost the economy by introducing new money into the private sector. Through the Principle Reduction Program your current lender is being reimbursed for 80% to 85% of their loss from TARP funds. They can write off the rest and take what would have likely become a problem loan off the books. This improves their balance sheet, gives them new money to lend, and will eventually increase their stock price.

    For example (see below), you may have a mortgage for $250,000 on a home worth only $150,000, and the monthly payment is $1458.93. A successful PRP would reduce the mortgage to $150,000, exactly what the home is worth, as well as lower your monthly payment to $923.58, a savings of $535.35!
    Value of Home Principal Balance Interest Rate Monthly Payment
    Current Loan $150,000 $250,000 5.75% 1458.93
    New Loan $150,000 $150,000 6.25% 923.58

    The current mortgage is paid off through principal reduction negotiations with your current lender, and a new mortgage is written at prime plus 3% for a new 30-year fixed note (currently, this would be 6.25% fixed) with a new lender. The Principal Reduction Program doesn't have any negative effect on one's credit rating as it will show the existing mortgage as paid off in full. The resulting new loan from the PRP is 100% LTV (loan to value) of the current fair market value of what the property is truly worth. There are no closing costs or mortgage insurance!

  5. Step 5


    The process starts with Atlantic Mutual getting you qualified for the program: gathering all the required documentation, requesting the broker price opinion, and submitting the documentation to your new lender. They take your paperwork, review it for accuracy, and make sure that all of the qualifications are met. After a preliminary review, your file is submitted to the lender's attorney group for review as well.

    Our group begins bargaining with the lender to purchase the loans, including yours and works with the lender to get access to TARP funds. Your lender must submit a formal request to the Federal Government for the TARP funds to reimburse them for 80% of the amount they are giving up in reducing your principal. Once they are notified that the funds have been secured, your lender can agree to the lower payoff amount.

    Your new lender now has the servicing rights to your loan and can finance a new loan at current market value for you. To do so, a new mortgage is written at the market value, and a closing date is chosen. Normal wait time for a closing is now 30-45 days. While there are no closing costs involved, your new lender still has to do all the normal due diligence involved in writing a mortgage including a title search to make sure there is clean title.

    For more information, please go to:,, or call 888-850-6772 to speak to one of our Financial Analysts. We can also be reached via email at

Posted in:General
Posted by Sherry Lee on February 23rd, 2010 11:05 PM



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