In certain scenarios, you can add your unpaid mortgage interest to the principal balance of your loan. This process is known as capitalization, but capitalization is not an option on every loan. Not only must your scenario warrant the move, but you must also qualify based on the lender’s approval criteria.
There are two different scenarios that warrant capitalization of unpaid mortgage interest. The first is a refinance. If you don’t capitalize your interest with the new loan, you must pay it as part of your closing costs. The other scenario falls under a workout arrangement. If the loan is delinquent and the unpaid interest is adding up, the lender may agree to capitalize the interest as part of a temporary change in terms, known as a forbearance agreement.
When you refinance your loan, you will complete an entirely new loan application, regardless of whether it is with your existing lender or a new lender. You will also provide updated financial information, including pay stubs, W-2 forms and tax returns, along with authorization to run your credit report. You will also need a payoff figure for your existing loan including all unpaid principal and interest.
The refinance lender will calculate your debt-to-income ratio and get a new appraisal of your property. If you qualify under the lender's guidelines, which can vary by lender, you can move forward and capitalize the interest. Lender guidelines typically include 80 percent loan-to-value and 40 percent debt-to-income. Under a forbearance agreement, you will need to meet with the lender’s collections department. Much of the information required will be the same as a refinance. You will have to show that you have a reasonable ability to repay under the modified terms with the capitalized interest factored in.
Once the lender has approved the new loan or forbearance, you must execute legal documents to finalize it. If you refinance, you will sign a full set of loan documents for a principal amount that includes both your unpaid principal and the newly capitalized interest. In a delinquency scenario, you will sign a forbearance agreement. This document will increase the principal amount of your loan, accounting for unpaid interest, and will change any other terms as negotiated with the collections department.
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