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Paying off debt ahead of time can save you a lot of money, especially if that debt is for a large amount like your mortgage.
Your mortgage lender expects you to pay down your mortgage monthly. If you have a 30-year mortgage, you are required to pay it off in 30 years — but there is a way to shorten that duration.
It’s called a mortgage curtailment.
In this article, we’ll break down everything you need to know about a mortgage curtailment — and help you decide if curtailment is right for you.
What is a Mortgage Curtailment?
Curtailment in general means a restriction, or to make less.
A mortgage curtailment involves reducing the amount you owe by prepaying part or all of the principal to reduce the total amount you will pay.
Mortgage curtailment can also mean paying off the entire loan earlier than required.
In other words, paying a little extra in a principal curtailment can yield a large benefit.
Joe has a mortgage of $150,000.
If he makes a single extra principal curtailment payment of $100 at the beginning of the loan, he will reduce the total amount of interest he will pay by $502.
If he makes a curtailment payment of an extra $100 for the first nine payments, he will save over $4,300 in interest and eliminate five payments off the term of the loan.
What is Mortgage Recasting?
Mortgage recasting is another type of curtailment.
Here’s how it works.
You make a large, lump-sum payment of around $5,000 or more toward the balance of your loan.
The mortgage lender will then adjust the amortization schedule to reflect a reduction in your monthly mortgage payments.
You may be liable for a small fee when recasting your mortgage.
How Are Mortgage Curtailment Payments Applied?
Principal curtailment payments are applied directly to the principal.
When you make a mortgage payment you pay a portion to the loan’s principal, and a portion to the loan’s interest.
When your mortgage begins, a large portion of your payment goes toward interest.
Over time, a growing portion goes toward paying down the principal.
The less you owe on the principal, the less interest you pay.
If you make principal curtailment payments, you speed up this process by reducing the balance of the loan.
Keep in mind that mortgage lenders have their own rules about how you can make extra curtailment payments.
Types of Mortgage Curtailment Payments
There are different types of principal curtailment payments: partial curtailment and full curtailment.
Curtailment payments allow you to pay down your mortgage debt faster.
Choosing between partial or full curtailment payments depends on the terms of your mortgage and your finances.
To lower the amount you owe on your mortgage and shorten the life of the loan, you can make a partial principal curtailment payment every month, or when your finances allow it.
Even partial principal curtailment payments in a small amount will have a strong impact on the balance of your loan by allowing you to save on interest.
Paying an additional $50 per month on a 30-year mortgage of $200,000 with an interest rate of 4.5% will save you over $17,000 in interest and shorten the loan by 43 months.
Paying an additional $100 per month would save you over $29,000 in interest and shorten the loan by 76 months.
In a full mortgage curtailment, you pay off your entire mortgage early if your mortgage lender allows it.
This option will save you thousands of dollars in interest over the life of the mortgage.
On a 30-year mortgage for $200,000 at 4.5%, you will pay a whopping $164,813.42 by the end of the term of the loan.
Paying off your mortgage after year one will save you $161,586.97 in interest.
How Do You Calculate Curtailment in Real Estate?
When you make a payment in a mortgage curtailment, subtract the additional payment from the balance of the principal. Your lender will then charge you interest at the mortgage rate on the remaining balance, which you have lowered.
Your mortgage lender and other online resources may offer a mortgage calculator that can show how curtailment payments impact your mortgage loan.
4 Tips for Mortgage Curtailment
- Let your lender know that you want to apply additional funds to the principal in a mortgage curtailment. Otherwise, the lender may simply consider the extra payment an advance on your next monthly payment.
- Use a mortgage calculator to find out how paying an additional amount in a mortgage curtailment will affect the amount you owe and the duration of your loan.
- Find out about possible fees, restrictions and prepayment penalties from your lender.
- Find out about tax considerations when you pay off your mortgage early.
The Bottom Line: Curtailment in Real Estate
If you decide to make principal curtailment payments in addition to your monthly mortgage payments, you will pay your loan off more quickly and save a lot of money.
The principal is the amount of money your mortgage lender loaned you when you bought your house.
When you make extra payments toward the principal, you reduce the amount you owe and lower the amount of interest you will pay over the course of the loan.
Keep in mind that making curtailment payments that are applied directly to the principal can save you thousands of dollars, but the amount of your monthly mortgage payment is not reduced. Instead, the duration of the loan is shortened.