What Is Mortgage Curtailment?
Sarah Sharkey4-minute read
April 21, 2021
As a homeowner, you likely have a mortgage loan on your property. Although you were happy to take out the mortgage to fund the home purchase, you might be ready to enjoy a curtailment mortgage.
Essentially, that 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 Does Curtailment Mean In A Mortgage?
Let’s start with the basic definition of curtailment. According to the Merriam-Webster dictionary, the word itself 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 all or part of your mortgage loan ahead of schedule. When you pursue curtailment of your mortgage, you will relieve yourself of mortgage debt.
How Does A Mortgage Curtailment Work?
So how does a mortgage curtailment work?
Borrowers can choose partial or full curtailment options by making extra payments of any size. When you choose to make extra mortgage payments, you will satisfy some of your mortgage loan balance ahead of schedule.
As you continue to make extra payments, you can reduce the total outstanding principal amount. And in turn, this can reduce the total amount of interest you pay on your mortgage loan.
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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.
By The Borrower
As a homeowner, you can make curtailment payments in a variety of ways.
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.
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.
Another popular option for homeowners considering mortgage curtailment is loan recasting, in which you make a large lump sum payment and re-amortize 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.
By The Lender
The borrower is not the only party that can curtail a mortgage loan. 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 are pursuing cash-out refinancing.
Difference In Curtailment Payments
There are two types of curtailment payments that you can look out for, partial and full.
A partial curtailment will not completely eliminate your mortgage loan balance. Instead, an extra payment or partial lump-sum payment will curtail the loan’s term.
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 will shorten the life of the loan.
Let’s look at an example. Say you take out a 30-year mortgage with a $100,000 principal and a fixed interest rate of 4%. The monthly payment is $477.42 to cover your principal and interest.
But you decide to put an extra payment of $50 per month toward your mortgage. With these extra payments, you would pay off your 30-year mortgage 4 years and 11 months early. Plus, you’d save $13,426.92 in interest payments.
It’s easy to see how partial curtailment payments can make a big difference.
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 a $125,000 outstanding loan balance. But 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 would eliminate your mortgage at once.
How This 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. That can be a big boon to your budget! 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.
Points To Keep In Mind
As you consider mortgage curtailment as an option for your future, you should keep some important points in mind.
First and foremost, extra mortgage curtailment payments do not replace your regularly scheduled mortgage payments. You cannot 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. But don’t risk your short-term financial viability. You want to have extra funds on hand in case your income cannot cover your mortgage payment in any given month.
Beyond that, lenders will not allow mortgage curtailment payments on loans that are not current. If you are behind on your mortgage loan, get up to date before pursuing mortgage curtailment.
And finally, you’ll need to look at the rules surrounding mortgage curtailment that your lender determines. Some are unable to accept extra payments but will accept a full curtailment payment. If you run into questions, then give your lender a call.
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.
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