What Is a Curtailment on a Mortgage Loan?
Optimize your mortgage. Learn how strategic payments directly to principal can reduce your total interest and shorten your loan's duration.
A curtailment on a mortgage loan is an additional payment a borrower makes specifically to reduce the outstanding principal balance. This extra payment goes beyond the regular scheduled monthly mortgage installment.
Understanding Curtailment Payments
A curtailment payment differs significantly from a regular monthly mortgage payment, which typically covers both accrued interest and a portion of the principal, and sometimes includes amounts for property taxes and homeowner’s insurance held in an escrow account. By targeting only the principal, a curtailment directly reduces the foundation upon which future interest charges are calculated.
When a borrower makes a curtailment payment, the lender applies the entire additional sum to the remaining principal balance, without allocating any part to future interest or upcoming scheduled payments. This immediate reduction in the principal amount is key to understanding its financial impact. It is generally not considered a pre-payment penalty, as most modern mortgage agreements in the United States do not include such clauses for partial extra payments.
Making a curtailment payment does not excuse the borrower from their regular monthly mortgage obligation. The scheduled payment for the next billing cycle remains due as usual.
Financial Impact on Your Mortgage
Making a curtailment payment can significantly reduce the total amount of interest paid over the life of a mortgage loan. Since interest is calculated on the outstanding principal balance, lowering this balance ahead of schedule means less interest will accumulate in subsequent periods. This allows a greater portion of future regular payments to go towards further principal reduction, creating a compounding effect of savings.
A curtailment payment can lead to a shorter loan term. If the borrower continues to make their regular scheduled monthly payments after reducing the principal through a curtailment, the loan will be paid off sooner than originally anticipated. The accelerated principal reduction means the total number of payments required to fully amortize the loan decreases. This outcome provides financial flexibility and can free up funds for other investments or financial goals in the future.
The benefit of these financial impacts grows with the size and frequency of curtailment payments. Even small, consistent additional payments can add up over time to substantial savings in interest and a noticeably earlier loan payoff date.
Steps to Make a Curtailment Payment
The first step in making a curtailment payment is to contact your mortgage servicer directly. Mortgage servicers have specific procedures for handling extra payments, and they can provide clear instructions on how to ensure the funds are applied correctly. It is important to understand their preferred methods for receiving these additional principal payments.
When communicating with your servicer, explicitly state that the extra funds are to be applied only to the principal balance of your loan. This instruction is crucial to prevent the servicer from mistakenly applying the payment as an advance on future regular installments or holding it in an unapplied funds account.
Common methods for making a curtailment payment include online portals provided by the servicer, mailing a check with specific written instructions, or making a payment over the phone. Some servicers may also offer options for setting up recurring additional principal payments. After making the payment, it is advisable to confirm with your lender, by checking your next mortgage statement or your online account, that the payment was accurately applied to the principal balance as intended.