If you’re an average homeowner in America, you probably have a mortgage loan on your property. While a mortgage can be a valuable tool to help you fund the purchase of your first home, a curtailment mortgage could open up additional financing opportunities by paying off the remainder of your mortgage loan ahead of schedule.
Today, let’s break down curtailment in more detail and explore how it could affect your mortgage loan.
What Does Curtailment Mean?
While you’ll typically hear curtailment referred to in business operations, curtailment also applies to mortgage loans when you pay them off ahead of time.
Stewart J. Guss from Attorney Guss says that “curtailment refers to paying off more of your mortgage than you owe. You can even pay off the entire mortgage at once, in what’s known as full curtailment. Paying a bit more than you owe is known as partial curtailment”.
Curtailment in the dictionary definition sense of the word means cutting something short. Curtailment can be applied to anything when you deliberately restrict or reduce the length of that item, loan, or activity.
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How Does a Mortgage Curtailment Work?
in a nutshell, a mortgage curtailment means that you pay off all or part of the remainder of your mortgage loan balance ahead of schedule. In doing this, you eliminate the mortgage debt and free up your future finances for other investments or uses.
A mortgage curtailment works when a borrower chooses either partial or full curtailment options and makes extra payments of any size. When you make mortgage payments beyond the minimum, you naturally pay down the mortgage loan’s principal ahead of schedule.
Mortgage curtailment becomes more effective the longer you practice it. As you make extra payments, you reduce the outstanding principal and how much interest you have to pay every billing cycle (because interest is calculated based on the remaining principal).
How Are Curtailment Payments Applied?
Are you interested in pursuing a mortgage curtailment? In that case, you need to know how you can apply curtailment payments to your mortgage loan.
Naturally, the homeowner or mortgage loan subject can make curtailment payments in a few ways. For example, you could make extra monthly payments throughout the year. Alternatively, you can make a big lump sum payment toward the outstanding principal.
Or you might consider loan recasting, which means making a large lump sum payment and re-amortizing your loan. However, this option is most common if a homeowner buys a new home before selling their first property. In this case, the homeowner has a big chunk of cash from the sale to put toward curtailing their current mortgage loan.
Lenders can also opt to curtail a mortgage loan during a mortgage modification process or if they made a calculation error in the loan closing process. During certain cash-out refinances, the lender may also decide to curtail some or all of the mortgage loan to allow the refinancing to go through.
What Are The Types Of Curtailment Payments
No matter whether the borrower or lender decides to curtail a mortgage loan, there are two types of curtailment payments to make.
A partial curtailment means that the payer doesn’t completely eliminate the remaining mortgage loan balance. That said, a partial curtailment payment still reduces the outstanding principal and affects the interest that the borrower must pay over the loan’s remaining term.
Note that your standard minimum monthly payment remains the same with a partial curtailment payment. Only your interest payments will differ since the principal is reduced by a certain amount.
An example can help illustrate how partial curtail payments can make a big difference.
Let’s say you take out a 30-year mortgage. The principal is $2400,000 and the interest rate is fixed at 5 percent. The monthly payment is $1,571.71 to cover your principal and interest.
However, you decide to put an extra payment of $100 per month toward your mortgage. With these bonus payments, you would pay off your mortgage a little over 3 years earlier. In addition, you’d save over $40,000 in interest payments.
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 paying off the remainder of a mortgage loan balance in its entirety. This is an extremely fast way to curtail a mortgage loan.
Say that your mortgage loan has $100,000 remaining on its total balance. If you come into $100,000 from selling another property, an inheritance, or any other financial windfall, you could use that cash to curtail your loan and no longer have to pay it off.
This will save you money in the long term since you won’t have to pay extra in interest for many billing cycles in the future.
How Do You Calculate Curtailment?
To calculate curtailment, take the amount you pay above your standard mortgage rate and subtract that from the principal on your loan. The balance that remains is what your interest rate will be based on. The following formula may help better explain:
Once you have the new principal amount, the best way to work through the updated interest rate is by reviewing your mortgage amortization schedule. This will show you how soon you can pay off your mortgage using curtailment or following the standard schedule.
How Do You Make A Curtailment Payment?
The best way to make a curtailment payment is to calculate how much interest you’ll pay over the remaining term of your mortgage loan, then decide how many years you want to shave off the term with your curtailment payment(s).
For example, say that you have a 30 year and $150,000 loan at 6% and a monthly payment of $900. The monthly interest is one-half of a percent, so $750 of your first mortgage payment goes to the interest alone. Only $150 goes to the principal.
Over the next month, interest is now calculated on the remaining balance of $149,850. So you pay $749.25 toward interest and $150.75 toward the principal for the second month.
Now say that you add $100 to the first payment of your $150,000 mortgage. This subtracts $502 in terms of total interest paid. Now say that you send an extra $100 with your first nine payments.
This will save you $4300 in interest, effectively saving you from having to pay five full payments over the loan’s total term.
As you can see, planning out your mortgage curtailment payments ahead of time will help you know how much extra to pay (if you plan to make partial payments, that is).
How Does Curtailment Affect Mortgage Payments?
Curtailment is always a flat benefit for your mortgage payment. You eliminate your mortgage loan more quickly, save by preventing yourself from accruing extra interest, and it can even be effective if you have a variable interest rate (since variable interest rates can be higher than your project).
Bottom line: mortgage curtailment is always financially wise if you can afford it since it makes your mortgage cheaper in the long term by reducing the principal and interest payments ahead of schedule.
Tips for Mortgage Curtailment
Mortgage curtailment can be very beneficial, but keep these major points in mind:
Extra mortgage curtailment payments don’t reduce the amount of your regular monthly mortgage payments. You still have to pay the same monthly amount each month. Therefore, you shouldn’t make extra payments if they risk your financial stability in the short term
Lenders don’t allow mortgage curtailment payments if your loan is not current. So make sure you are not behind on your mortgage loan before pursuing this option
Always make sure that your lender doesn’t have any special mortgage curtailment rules. Some, for example, don’t accept extra partial payments but do accept full curtailment payments
All in all, mortgage curtailment is a valuable financing strategy for homeowners who wish to maximize their long-term savings and who have a little extra cash to spend at the moment. Consider adding just a little bit to your monthly mortgage payments each billing cycle and you may end up shaving years off your total loan term.
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