A principal curtailment, also known as a mortgage curtailment, occurs when you make an extra payment on your mortgage. In this way, you reduce the total amount of the loan.
By reducing your loan balance, you reduce the amount of interest you will owe.
What Is Principal Curtailment?
A Mortgage principal curtailment is a fancy way of saying you owe less on your home loan. Principal reduction can happen when you pay extra each month or make large periodic mortgage principal payments.
A curtailment can also happen as part of a loan modification, where the terms of your loan change to make it easier for you to pay. They can also correct lender errors or close cases.
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What Ways Can You Make Curtailment Payments?
There are several different ways to make reduced payments. You can make a partial or full reduction in payments. If you make partial payments, you can choose to do so regularly or when possible.
For example, one potential strategy would be to pay a little more each month. Let’s say your monthly payment is $2,000 per month before interest. You choose to pay $2,100 per month. If you do this consistently for 20 months, you will effectively eliminate your monthly mortgage payment.
You can also make payments quarterly or annually. For example, you could increase your principal payment by $500 every three months.
You can also choose a less structured repayment strategy. Instead of making regular mortgage payments, you can make additional payments when you can.
An example of this would be if you received a tax refund as discussed earlier. Putting that little extra money toward reducing your mortgage principal will not only help you pay off your loan faster, but it will also save you money on interest payments.
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Are There Downsides To Principal Curtailment?
There are several disadvantages of mortgage reduction that you may want to consider. First of all, you should check the fine print on your loan to make sure you can pay off your mortgage early without incurring early repayment penalties.
Many lenders have waived prepayment penalties, but you can check the terms of the loan to make sure. If there are conditions, they may not apply during the entire term of the loan.
For example, your lender may not allow you to pay off the loan before the first 24 months are up. Your lender can work with you to determine how an additional mortgage payment will affect your loan based on your unique financial situation.
Another possible downside to reducing your principal is that you may end up owing more money in taxes. The IRS allows you to deduct mortgage interest from your taxes. However, because you’re paying down the principal more actively, you won’t be charged as much interest. So, if you suddenly start paying the outstanding principal, you should be aware of the possible tax consequences.
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What Is Principal Curtailment On Mortgage?
A mortgage curtailment means that you pay off all or part of your mortgage loan early. By doing this, you eliminate your mortgage debt and free up your future finances for other investments or uses.
The limitation of the mortgage loan works when the borrower chooses the options of partial or full limitation and makes additional payments of any size. When you make mortgage payments above the minimum, you are naturally paying off your mortgage principal early.
Mortgage foreclosure becomes more effective the longer you practice it. By making extra payments, you reduce the amount of outstanding principal and the amount of interest you have to pay each payment cycle (since interest is calculated based on the principal balance).
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How To Utilize Principal Curtailment
Your mortgage must be current to take advantage of the principal reduction. When you send a principal reduction, always provide clear instructions on how to apply it to the principal balance of your mortgage.
Some mortgage lenders also limit the amount of principal reduction that can be applied to a loan in one transaction. Lenders also typically don’t allow borrowers to make principal reduction payments that equal or exceed the total balance of their mortgage loan.
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How Are Curtailment Payments Made?
How curtailment payments are applied will depend on your lender and the terms of your mortgage. Many lenders accept additional payments on top of your scheduled monthly payments.
But not all lenders accept principal payments only. If they don’t, some of the extra payment will likely go to interest and fees.
Before you make your first reduced payment, call your lender to check their policies. Some lenders accept funds online or over the phone, while others require you to send an additional payment along with your scheduled monthly payment.
Plus, extra payments usually don’t lower your projected loan payment unless you refinance (more on that later). Your lender may also reduce your mortgage. This usually happens when the lender made a mistake in the depreciation calculations.
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What Are The Different Types Of Curtailment Payments?
If you are interested in paying off your mortgage faster, you can choose between two types of reduced payments: partial and full. Which option you choose will depend on your financial situation and the terms of the mortgage loan.
Full Curtailment
Full curtailment means paying off the remaining mortgage balance in full. This is an extremely fast way to close the mortgage loan.
Let’s say you have $100,000 left on your total mortgage loan balance. If you receive $100,000 from the sale of other property, an inheritance, or any other financial proceeds, you can use that money to reduce your loan and no longer have to pay it off.
This will save you money in the long run because you won’t have to pay extra interest for many payment cycles in the future.
Partial Curtailment
Partial curtailment means that the payer does not completely cancel the balance of the mortgage loan. However, the partial payment restriction still reduces the outstanding principal and affects the interest the borrower must pay for the remainder of the term.
Note that your standard minimum monthly payment remains the same with a partial payment reduction. Only your interest payments will differ because the principal is reduced by a certain amount.
Mortgage recasting
Another option that lies between a partial cut and a full cut is a mortgage review. When you review a mortgage, you make a large one-time payment (usually $5,000 or more) toward the balance, and the lender adjusts the loan’s amortization schedule, reducing your monthly payments. Some lenders may charge a small fee for remortgaging.
Mortgage refinancing
If you refinance your mortgage, you can potentially lower your interest rate, but you will have to pay closing costs. Recasting can be a strong alternative to refinancing if interest rates have risen. If interest rates have fallen, refinancing can lead to greater long-term savings.
Conclusion
Curtailment is always a permanent benefit to your mortgage payment. You pay off your mortgage faster, save money by preventing extra interest, and it can even be effective if you have a variable interest rate (since the variable interest rate can be higher than your project).
Reducing your mortgage is always a good financial option if you can afford it, as it makes your mortgage cheaper in the long run by reducing principal and interest payments early.
Overall, mortgage reduction is a valuable financing strategy for homeowners who want to maximize their long-term savings and have a little extra cash to spend now. Consider adding a little to your monthly mortgage payments each payment cycle and you can shave years off your total loan term.
Principal Curtailment FAQs
Is Principal Curtailment A Risk?
Principal Curtailment is a risk for the bank that provides the mortgage loan or for the investor that owns the mortgage security. Early mortgage payments can, for example, reduce the income an investor receives from a mortgage-backed security.
Why Do Mortgage Borrowers Not Make Use Of Principal Curtailment Payments?
Mortgage lenders also earn less income in the form of interest payments when borrowers use principal reduction. However, many mortgage borrowers do not use principal reduction payments because they need more money than their stated mortgage payment amount.
How Long Does It Take To Apply Principal Curtailment Payments To Account Balances?
Principal reduction payments cannot be applied to account balances immediately after they are paid. Many mortgage lenders apply principal reduction to borrowers’ account balances only once a year, usually at the end of the year.
Does Extra Mortgage Curtailment Payments Reduce The Amount Of Your Regular Monthly Mortgage Payments?
Additional mortgage reduction payments do not reduce the amount of your regular monthly mortgage payments. You still have to pay the same monthly amount each month. Therefore, you should not make additional payments if they threaten your financial stability in the short term.
