Curtailment means to cut short. In the case of mortgage curtailment, it most commonly means you cut short your mortgage terms by paying off the mortgage in full. However, that's not always the case. If you make bi-weekly mortgage payments or receive an inheritance and use it to pay off the mortgage, you're using a form of mortgage principal curtailment. Read on to learn more.
What Does Principal Curtailment Mean in Mortgage?
Principal curtailment on a mortgage means making extra payments against the principal to pay off the loan faster. This can include both a partial or full principal curtailment. For example, principal-only payments are a form of mortgage curtailment. While it's common for the borrower to initiate mortgage curtailment, the lender may curtail your mortgage loan.
A partial curtailment happens when you make extra payments against the principal owed to reduce the outstanding balance. A total mortgage curtailment occurs when you pay off the loan balance with a lump sum ahead of schedule.
How Does it Work?
How principal curtailment works is the same whether you curtail the mortgage partially or completely. The only difference is in the amount involved. In partial curtailment, you can make additional principal payments of any size. Many borrowers choose to do this by making biweekly mortgage payments.
You could also make a lump-sum payment once per year or at any other interval. With each payment, you satisfy some of your mortgage loan balance before it is due, helping you pay off the mortgage balance earlier, potentially saving on interest.
If you curtail the mortgage completely, you'll pay off the full mortgage balance at once. For example, if you have a $100,000 principal balance on your mortgage and inherit $150,000, you could pay the $100,000 balance. That would create a full principal curtailment and clear the loan balance.
How to Make Curtailment Payments
If you're ready to curtail your mortgage months or years ahead of schedule, you could pay extra payments or a lump sum. In some cases, the lender may also curtail a mortgage. Here's what you need to know in either case.
If You’re the Borrower
You can make curtailment payments in various ways to reduce your mortgage balance. The most common way is to make extra monthly payments throughout the year. With each extra payment, you’ll reduce your mortgage balance.
A second option is to make a lump-sum payment toward your outstanding principal. The payment is applied to the loan balance to curtail the term of your mortgage loan. If you're in financial distress, you can also consider a Principal Reduction Alternative under the Home Affordable Modification Program.
Finally, you can consider loan recasting as a form of principal curtailment. With loan recasting, you make a large lump-sum payment and reamortize your loan. You might choose this option if you buy a new home before selling your first home. When the first home sells, you can apply much of the sale to the new loan and go forward with a loan recasting.
If You’re the Lender
As the lender, you may curtail your mortgage loan based on a mortgage modification or calculator error in the loan closing process. Depending on the situation, this can recall the loan before reissuing it.
Types of Curtailment Payments
There are both partial and full principal curtailments. They affect your mortgage principal and the total interest. Here is how these differ.
Partial Curtailment
A partial curtailment does not eliminate your mortgage loan balance at once. Instead, you'll make extra or partial lump-sum payments to help curtail the loan’s term.
With a partial curtailment payment, your monthly payment will remain the same. However, the mortgage amortization schedule will be altered to reflect the lower outstanding principal balance. Extra payments serve to shorten the mortgage term, potentially helping you save on interest.
For example, if you have a 30-year mortgage with a $300,000 principal and a fixed interest rate of 7%. The monthly payment is $1,995.91 to cover your principal and interest.
If you decide to put an extra payment of $500 per month toward your mortgage, you could pay off your mortgage in 17 years and four months or 12 years and eight months early. You’d also save nearly $200,000 in interest payments.
Even with a more modest $100 per month extra, you could pay off the mortgage in 25 years and 10 months while saving nearly $70,000 in interest payments. It’s easy to see how partial curtailment payments can make a big difference.
Full Curtailment
If you choose a full curtailment, you will immediately pay off your mortgage’s outstanding balance, curtailing the loan with full repayment. Not all lenders allow this option, but you can speak to yours to understand whether it's possible to eliminate the mortgage if you have the funds to do it.
For example, if you have a $220,000 outstanding loan balance and you receive a windfall of $300,000 through an inheritance, you could use $220,000 to curtail your mortgage loan.
Pros and Cons
The pros of principal curtailment come down to interest savings and outright homeownership. Advantages of principal curtailment include:
- Save on interest payments
- You will own your home outright faster, accelerating the equity you build in the property.
- You can create a curtailment schedule personalized to your financial needs.
- You will have a shortened mortgage term.
- If you put down less than 20%, principal curtailment can help you cancel private mortgage insurance faster (by reaching 20% equity in the home).
The disadvantages of principal curtailment include:
- You could face additional financial stress if you make extra mortgage payments at the expense of other savings goals like an emergency fund or retirement savings.
- Sometimes, other investments offer a higher return than mortgage principal curtailment; you should compare options before making the best selection for your financial situation.
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Should You Cutrail Your Mortgage?
Principal curtailment can help you save significantly on interest rates. You could build equity in the home faster, reduce total debt and give yourself additional peace of mind in owning your home sooner. Weighing the benefits of principal curtailment payments with other savings or financial goals, like maxing out a Roth individual retirement account (IRA), building your emergency fund or other retirement savings, is important.
If you can afford an extra $50 to $100 monthly toward your mortgage payments, it would help you save significantly in the long run. You can also find 10 steps to lower your mortgage payments here.
Frequently Asked Questions
Is principal curtailment the same as regular payment?
No, principal curtailment isn’t the same as a regular payment. Regular payments are made according to your standard mortgage terms; principal curtailment is an additional payment toward the mortgage principal.
How do you make a mortgage payment strictly a principal curtailment?
To make mortgage payments a principal curtailment, you could add some money to your monthly payment or make a lump sum payment on the balance whenever you have extra cash. You can also consider biweekly mortgage payments instead of monthly payments to pay off your mortgage faster.
Does a mortgage company charge a fee for curtailment?
Some mortgage lenders charge a prepayment penalty when you pay all or part of your loan off early. However, most mortgage companies don’t charge a fee for curtailment, but you should speak with your lender to confirm its policy.