Mortgage curtailment is the act of paying off a mortgage ahead of schedule by making additional payments. This accelerates the repayment process and shortens the loan term, helping homeowners potentially save thousands in interest payments. Here’s a closer look at mortgage curtailment, how it works and some of the primary benefits of this repayment strategy.
A financial advisor can help guide you through the home-buying process and integrate your purchase into a comprehensive financial plan.
How a Mortgage Curtailment Works
The mortgage curtailment process involves making extra payments that are applied to the loan’s principal amount. As the principal balance decreases, the interest charged on the remaining balance also diminishes.
These extra payments can be made each month, sporadically or even in one lump sum. This expedites the reduction of the outstanding balance and results in less interest accruing over the life of the loan.
For instance, suppose you have a 30-year, $200,000 loan at a 4% interest rate. By making an additional $100 payment per month, you could abbreviate the loan term by 4.5 years and save almost $26,852 in interest. Now, visualize a different scenario where you have a larger loan amount or a higher interest rate. Making similar extra payments can lead to varying levels of savings and term reduction.
However, it’s not always the borrower who initiates the mortgage curtailment. A lender can curtail a mortgage if there is some modification that’s made to the loan or an error was made during the closing process.
How a Mortgage Curtailment Is Applied
Before you start making extra payments, you’ll want to first reach out to your lender and get a sense of any rules or policies they have surrounding mortgage curtailment. Assuming the lender allows you to curtail your mortgage, the extra payments you make will be applied to the loan principal.
But some lenders may require a written request specifying that the extra payments should be applied toward your loan’s principal. Other lenders may apply extra payments to just the interest. Also, keep in mind that you’ll need to continue to make your regular monthly payments, even if you choose to pay extra some months.
Partial Curtailment vs. Full Curtailment
The strategy of mortgage curtailment can be implemented either partially or fully, each having its own advantages and implications. Here’s a closer look at the two options:
Partial Curtailment
Partial curtailment involves making smaller, additional payments toward your mortgage principal. This approach provides flexibility, allowing homeowners to decide the quantum of the extra payment and timing. Depending on their financial situation, some homeowners might find the benefits of this flexibility preferable, such as reducing the loan term and total interest paid over the life of the loan.
Full Curtailment
On the other hand, full curtailment involves paying off the entire mortgage balance in one lump sum. While this strategy can lead to significant interest savings and the immediate gratification of being mortgage-free, it necessitates a significant amount of available cash. Hence, it may not be viable for everyone. Therefore, the potential risks, especially in terms of cash availability, should be evaluated against the benefits.
Benefits of a Mortgage Curtailment
Mortgage curtailment doesn’t only present financial advantages, but psychological benefits, as well. Here’s a look at the primary benefits of this mortgage repayment strategy:
- Reduced interest payments: One of the most compelling benefits of mortgage curtailment is its potential to drastically reduce the overall interest payments over the life of the loan. Every extra payment made directly toward the principal amount not only diminishes the outstanding balance but also lessens the interest calculated on that balance. Over time, this can translate to thousands of dollars saved.
- Accelerated debt repayment: By consistently making extra payments, the mortgage term can be significantly shortened. What might have been a 30-year commitment can potentially be cut down to 20 or even 15 years.
- Equity building: As you curtail your mortgage, you’re building equity in your home at an accelerated pace. Higher equity not only strengthens your financial position but also offers more options, such as accessing home equity loans for major expenses or even selling your property for a healthier return on investment.
- Peace of mind: Imagine the peace of mind that comes with having a significantly reduced mortgage balance. Unforeseen financial difficulties are more manageable when your monthly housing obligation is minimized due to your curtailment efforts.
- Interest savings snowball effect: The concept of the “snowball effect” applies to mortgage curtailment. As you progressively reduce the principal balance, the interest calculated on that balance decreases. This creates a positive feedback loop, enabling you to save more money with each subsequent payment.
- Flexibility and control: Mortgage curtailment offers homeowners a remarkable level of financial control. You can choose when and how much to make as extra payments, aligning with your budget and financial goals.
However, consideration must be given to potential disadvantages. For instance, the lender may charge early mortgage payoff penalties. Homeowners should also ensure they maintain an adequate emergency fund before committing to mortgage curtailment. If the extra payments come from the homeowner’s emergency fund, it could leave them cash-strapped in the face of an emergency or unexpected expense.
Bottom Line
Mortgage curtailment can potentially be a beneficial strategy for homeowners looking to save on interest and shorten their loan term. A partial curtailment enables you to make smaller, additional payments toward your mortgage principal, while a full curtailment involves paying the outstanding balance with one lump sum. Before curtailing your mortgage, you’ll want to review your lender’s policies and rules surrounding these extra payments.
Home Buying Tips
- A financial advisor can help you get your finances in order before you purchase a home. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- It’s important to stick to a budget when you’re shopping for a home. SmartAsset has a tool designed to help you see how much house you can afford. Meanwhile, our mortgage calculator can help you estimate how much your monthly payments could be and how much the loan will cost you in the long run.
- Be sure to shop around for a competitive interest rate. SmartAsset tracks mortgage rates on a daily basis so you can understand your loan options.
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