What is mortgage curtailment?

As a homeowner, you likely financed your home purchase with a mortgage loan. Although you might’ve been prepared to make the full mortgage payments until the end of the loan term, you could be ready to take on a curtailment of your mortgage.

Essentially, this means you’ll eliminate all or a part of your mortgage ahead of schedule. Ready to learn how mortgage curtailment can work for you? Here’s what you need to know.

What is curtailment on a mortgage?

Let’s start with the basic definition of curtailment. According to the Merriam-Webster dictionary, the word “curtail” means to “make less by or as if by cutting off or away some part.”

In the context of a mortgage, you can “make it less” by paying off your mortgage early, whether that be paying off a part of the loan or the full amount. When you pursue curtailment of your mortgage, you’ll relieve yourself of mortgage debt.

How does a mortgage curtailment work?

Borrowers can choose partial or full mortgage curtailment options by making extra payments of any size. When you choose to make extra mortgage payments, you’ll satisfy some, or all, of your mortgage loan balance ahead of schedule.

As you continue to make extra payments, you can reduce the total outstanding principal loan amount. Since principal and interest are two basic components of every mortgage payment, curtailment can also reduce the total amount of interest you pay on your mortgage loan.

How is a curtailment payment applied?

If you want to pursue a mortgage curtailment, it’s critical to understand how the payments are applied. Let’s take a closer look from the perspective of both the borrower and the lender.

As The borrower

As a homeowner, you can make curtailment payments in a variety of ways.

• Extra monthly payments: The most common way is to make extra monthly payments throughout the year. With each extra payment, you’ll chip away at your mortgage balance.
• Lump sum payments: Another option is to make a lump sum payment toward your outstanding principal. When the payment is applied to the loan balance, you’ll curtail the term of your mortgage loan.
• Loan recasting: With loan recasting, you make a large lump sum payment and reamortize your loan. This is most common when a homeowner buys a new home before selling their first home. When their first home sells, they may choose to apply a large portion of the sale to their new loan and go forward with a loan recasting.

As The lender

In some cases, a lender may curtail your mortgage loan.

Your lender may choose to curtail your mortgage loan based on a mortgage modification or calculator error in the loan closing process. Additionally, this may come into play if you’re pursuing a cash-out refinance.

Difference in curtailment payments

There are two types of curtailment payments that you can look out for: partial and full. Let’s look at how each curtailment payment option works.

Partial curtailment

A partial curtailment will not eliminate your mortgage loan balance. Instead, an extra payment or partial lump-sum payment will curtail (or shorten) the loan’s term (or length).

When you make a partial curtailment payment, your monthly payment will remain the same. However, the loan’s amortization will be altered to reflect the lower outstanding principal balance. With any extra payments, you’ll shorten the life of the loan.

Principal curtailment on a mortgage example

Let’s look at an example. Say you take out a 30-year mortgage with a $300,000 principal and a fixed interest rate of 6.5%. Excluding property taxes and homeowners insurance, your monthly payment would be about $1,896 to cover your principal and interest.

Let’s say you decide to put an extra payment of $100 per month toward your mortgage. With these extra payments, you’d pay off your 30-year mortgage 4 years early. Plus, you’d save $60,996 in total interest by making the accelerated payments.

It’s easy to see how partial curtailment payments can make a big difference.

Full curtailment

A full curtailment means that you pay off your mortgage’s entire outstanding balance in one fell swoop. That would be a fast way to curtail your loan.

Although not all lenders allow this option, it’s worth looking into if you want to eliminate your mortgage and have the funds to do so.

Let’s say you have $125,000 remaining on your loan balance, and you receive a windfall of $130,000 through an inheritance. You decide to use $125,000 of these new funds to curtail your mortgage loan. In this case, you’d eliminate your mortgage at once.

How curtailment impacts your mortgage

If you decide to pursue mortgage curtailment, the benefits are worthwhile.

The most obvious win is that you’ll eliminate your mortgage loan. Plus, you’ll save on interest payments along the way.

If your mortgage loan has a variable interest rate, pursuing mortgage curtailment can help you avoid the risk of rising interest rates.

What to consider before using a mortgage curtailment

As you consider mortgage curtailment as a future option, you might want to keep some important points in mind.

First and foremost, extra mortgage curtailment payments don’t replace your regularly scheduled mortgage payments. You can’t skip your monthly mortgage payments while making extra payments. We don’t recommend throwing your emergency savings into a mortgage curtailment plan. Instead, pay it off as you can without risking your short-term financial viability. You might want to have extra funds on hand in case your income can’t cover your mortgage payment in any given month.

Beyond that, lenders may not allow mortgage curtailment payments on loans that aren’t current. If you’re behind on your mortgage loan, you’ll need to get up to date before pursuing mortgage curtailment.

Finally, you’ll need to look at the rules established by your lender surrounding mortgage curtailment. Some lenders are unable to accept extra payments but may accept a full curtailment payment. If you run into questions, contact your mortgage lender.

The bottom line

Mortgage curtailment payments can help you eliminate your mortgage loan balance ahead of schedule. It can be worth the extra payments to achieve financial freedom sooner.

If you think a refinance will be the best way to help you pay down your mortgage, get started on the refinance process today with Rocket Mortgage^®.