How will mortgage lenders treat borrowers caught by Katrina? Speculations about this abound, some plausible, some ridiculous. This note lays out the alternatives, and their implications for both parties. I will illustrate them with an example. The loan balance of the affected borrower is $100,000, the rate is 6 percent, the loan has 300 months (25 years) to run, and the monthly payment is $644.31. Five hundred dollars of this payment is interest and $144.31 is principal. Assume the borrower needs a "payment holiday period" of three months. Option 1: Add the unpaid monthly payment ($644.31) during the holiday period to the balance, then recalculate a new payment. This is an absurd option because the lender would be penalizing the borrower rather than helping him/her. (I would never have ...
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