A curtailment occurs when a homeowner pays off his or her mortgage balance ahead of schedule. This may be done either in the form of a lump sum that clears the mortgage entirely or smaller additional monthly payments. However, lenders can also curtail your loan if there has been a calculation error or a loan modification.
The word “curtailment” refers to restricting or cutting something short. So it makes sense that in the mortgage world the term is used to describe paying off a mortgage loan ahead of the expected end date. By making additional small payments, or one large lump sum, homeowners can avoid paying a lot of money in interest payments. However, some lenders may not allow curtailment payments.
Keep reading to learn more about the benefits of curtailment and how it applies to your mortgage payments.
What does mortgage curtailment mean?
A curtailment means that you have made extra mortgage payments, even though they weren’t required. This, in turn, allows you to completely eliminate your mortgage loan balance ahead of the scheduled time and saves you from paying extra interest.
In most cases, the borrower is the one who decides to make extra mortgage curtailment payments. You can curtail your mortgage partially or fully. However, a loan servicer or lender may also choose to curtail a loan in some cases.
More often than not, lenders will do this if there was an error during closing or while the loan is being modified. On the other hand, some lenders may permit a cash-out refinance and curtail the remaining mortgage loan balance.
How does mortgage curtailment work?
When you make additional monthly mortgage payments, the extra funds are applied directly to the principal balance. The more money you pay per extra payment, the more effective the curtailment will be.
If you have a closed mortgage, you may end up with a curtailment charge even if you’re just going for a partial curtail on your loan. Be sure to consider this fee before making extra payments.
What’s the difference between curtailment and a mortgage recast?
Curtailment may bring mortgage recast to mind, but there are some major differences between the processes:
- Curtailment doesn’t change your monthly payments. When you pay your loan ahead of time, your monthly payments won’t shrink like they would if you asked for a mortgage recast. Instead, your mortgage payoff date inches closer based on how much extra you paid.
- Most curtailments don’t require fees. Although some lenders do charge a prepayment penalty, you typically don’t have to pay for a mortgage curtailment.
- Curtailment is available to anyone. Because you aren’t changing the interest rate or terms of the loan, anyone can curtail their loan. However, not every lender or loan permits mortgage recasting. For example, FHA, VA, and USDA loans do not offer mortgage recast options.
Is curtailment the same as principal?
Curtailment does not mean the same as principal. “Principal” refers to the main balance of the loan. Curtailment refers to a payment that is done in addition to the regular mortgage payments.
Does principal curtailment reduce interest?
Yes. Since interest accrues over time, a principal curtailment will reduce the amount of interest owed. That’s why so many people choose to make that extra mortgage payment when they can.
How is a curtailment payment applied?
Both borrower and lender can curtail a loan, although each one does so for different reasons. Let’s take a closer look at how this works.
Borrowers can curtail their mortgage by making extra payments on their variable interest rate or fixed-rate mortgage. Every time you pay extra, the funds go towards the principal debt that you have. If you do this regularly, you can shorten your loan’s term.
You can also pay off the loan in full, meaning you could save on interest payments. Either way, you’ll ultimately spend less time in debt, which frees up your money for other projects.
Lenders might curtail your loan if they notice an error in the mortgage calculations or if your mortgage was recently modified.
What if I can’t afford my current mortgage?
Curtailment payments are great for people who can afford to make extra payments, but that’s not possible for everybody. If you’re struggling to make your current monthly payments, you may want to consider refinancing your mortgage. But don’t stop at one offer. It’s best to compare multiple lenders to get the best rate and terms possible.
Types of curtailment payments
If you want to reduce your mortgage interest or the lifetime of your loan, curtailment may be a great option for you. Fortunately, we outline two main types of curtailment options you can consider.
- Full curtailment. With this method, the borrower makes one large cash lump sump that pays off the rest of the mortgage entirely.
- Partial curtailment. If you don’t have the money for a full curtailment, you can make extra monthly payments on top of your regular scheduled bill. These payments count towards your principal and slowly shorten your loan term.
Most people who want to shorten the life of their loans opt for partial curtailment payments. While it won’t erase your debt overnight, this method is much easier on your wallet.
How do I make a curtailment payment?
Fortunately, you can make electronic or physical payments to your mortgage principal. However, it’s important to specify to your lender that you want the payments applied to your principal and not your interest. Otherwise, the main loan balance won’t decrease.
You can use any of the below payment options to make extra curtailment payments. Regardless of what payment method you choose, have your account information ready beside you.
- Online. Most mortgage lenders offer online options for mortgage payments. Again, make sure you specify that this payment be applied to your principal (which most online payment portals offer).
- By mail. Identify the line item for “excess payment” and include that in the memo section of your check. In this case, “excess payment” will be applied to your principal.
- By phone. You can always call your lender and inform them you’d like to make an additional payment. However, be sure to receive verbal confirmation that this payment will be applied to your principal.
- In person. If you don’t feel comfortable with the other options, you can always visit your lender in person and make a payment at your local branch. Again, specify that you want your payment applied to the principal balance, not the interest.
How does curtailment affect mortgage payments?
Curtailment will not lower your monthly payment, nor will it lower your interest rate. However, it will curb how much interest you have to pay down and lower the number of months you have to continue making payments.
Tips for mortgage curtailment
If you’re planning on curtailing your mortgage, don’t forget to keep these tips in mind.
- Plan things out. If you’re not sure whether you have the cash on hand, or if you aren’t sure how long it would take to pay off your loan, use a mortgage calculator or talk to a financial advisor. They will be able to give you the best advice possible.
- Don’t be afraid to do smaller monthly payments. The more additional payments you make, the more effective a curtailment mortgage process will be.
- If you want to make one full curtailment payment, prepare for a prepayment penalty. Check your mortgage paperwork to see if your loan terms include a prepayment penalty.
- If you want a lower monthly payment or are looking for a modification on your loan, consider an alternative. A large lump sum payment can also be used to recast your loan. However, if you’re having a hard time with your mortgage debt due to your interest rates, you might want to look at a refinance process instead.
- Mortgage curtailment is a great way to reduce your loan’s term and the amount of interest you pay.
- A partial curtailment payment will decrease interest paid as well as the loan term; a full curtailment will pay off the rest of the loan.
- Lenders may do a partial curtailment if they notice an error made during the loan closing process.
- Every extra payment you make will shorten your mortgage term, but it will not make your monthly mortgage payment decrease.
- Principal Reduction Alternative Under the Home Affordable Modification Program — IRS
- Tax Information for Homeowners — Office of Loan Programs, University of California
- How to Finance a House — SuperMoney
- 2021 Mortgage Industry Study — SuperMoney
- Mortgage Refinance: Reviews & Comparisons — SuperMoney
- Best Mortgage Lenders | February 2022 — SuperMoney