The Capitalization of a Mortgage

Capitalization, the process of adding expenses into the overall price of an asset, applies equally to mortgage debt. In this scenario, the lender adds unpaid mortgage interest or other money, such as closing costs, to the principal of the loan. Homeowners who fall delinquent with their mortgage payments may be offered capitalization as a type of debt settlement.

Loan modifications that capitalize missed mortgage payments take the borrower’s mortgage debt and add it back into the mortgage, recalculating the monthly repayments. This process, also known as consolidation, makes the loan current again. While this process abates the homeowner's default and the immediate threat of foreclosure, the more a loan is capitalized, the more expensive it will be. Capitalization is not a viable solution if the homeowner cannot pay the debt on its modified terms.

Borrowers who are not delinquent but who wish to temporarily reduce or suspend their mortgage repayments may seek forbearance. During an agreed period of time, payments cease, the loan is not considered delinquent and the portion of the suspended payment that would have gone toward the loan's interest is added back into the principal. While forbearance creates higher payments when the forbearance period ends, it offers a temporary reprieve to those struggling with their debt load in the short term.

Certain mortgage products, known as negative amortization mortgages, come with built-in interest capitalization. In this scenario, the lender allows the borrower to repay only part of the interest due each month. The balance is added to the principal, which ratchets up the mortgage debt as time goes on.

While these types of products may assist homeowners who wish to keep their payments low in the early years of the mortgage, the payments will increase throughout the term to amortize the loan. The federal government regards some types of negative amortization loans as predatory loans.

Capitalization is a form of refinance and involves the processes and paperwork of any financing transaction. Generally, to be eligible for a loan modification, you must show that you cannot meet your current obligations due to financial hardship. And you must be able to pay the modified amount.

Once approved, you must sign legal documents to finalize the capitalization — typically a full set of loan documents with a principal that combines the old loan balance and the capitalized interest.