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Homeowners often consider making extra mortgage payments to pay off their loans faster, known as mortgage curtailment. While it’s a popular strategy, its effectiveness varies depending on individual financial goals and circumstances. Let’s delve into whether mortgage curtailment is a suitable option for you.
What Is Mortgage Curtailment?
In essence, Mortgage Curtailment is a strategic financial decision that accelerates the repayment of the loan by targeting the principal balance. By making additional payments, homeowners can reduce their debt burden and save money on interest costs over time.
This approach is particularly beneficial for individuals looking to pay off their mortgage faster and build equity in their homes.
How Does A Mortgage Curtailment Work?
Making a curtailment payment on your mortgage can have significant benefits. By applying extra funds directly to the principal balance, you reduce the amount on which interest is calculated.
This leads to lower subsequent interest charges and more of your regular payments going towards paying off the principal. Ultimately, this results in a faster decrease in your mortgage balance over time.
Let’s look at two hypothetical scenarios to better understand how mortgage curtailment works:
- 1st Situation: Regular payments on a 30-year mortgage of $200,000 with an interest rate of 4%.
- 2nd Situation: Mortgage curtailment on a 30-year mortgage of $200,000 with an interest rate of 4%.
It’s crucial to understand that Mortgage Curtailment differs from Prepayments. Although both strategies necessitate additional payments towards the principal balance, Prepayments are typically made at regular intervals and in fixed amounts.
In contrast, curtailment payments can be paid at any time and in any amount as long as they exceed your regular mortgage payments.
How Are Curtailment Payments Applied?
It’s important to understand how the payments are applied if you want to pursue a mortgage curtailment. Let’s take a closer look from the borrower’s and lender’s perspectives.
The Borrower
There are several ways that you, as a homeowner, can make curtailment payments.
- Extra monthly payments: The most common approach is to make extra monthly payments throughout the year. With each additional payment, you will reduce your mortgage balance.
- Lump sum payments: Another alternative is to make a single payment in full towards your outstanding principal. When you apply the payment to the loan balance, you reduce the term of the mortgage loan.
- Loan recasting: This is when a large payment is made toward the principal of a loan, leading to the amortization of the remaining balance. Homeowners often use this strategy when buying a new home before selling their current one. By putting a substantial amount from the sale towards their new loan and recasting it, they can potentially reduce monthly payments and overall interest expenses.
The Lender
Mortgage Curtailment can be initiated by lenders in cases where loan modifications are necessary or errors occur during the closing process.
Both borrowers and lenders need to understand the implications of mortgage curtailment within the realm of financial agreements.
What Are the Different Types of Curtailment Payments?
Curtailment payments come in different types. Your mortgage loan terms and your financial situation will determine which option you take.
Partial curtailment
A partial curtailment is a method where you make extra or partial lump-sum payments to shorten the term of your mortgage loan. These payments do not eliminate your loan balance immediately, but they alter the mortgage amortization schedule to reflect the lower outstanding principal balance. This can help you save on interest by shortening the mortgage term.
For instance, if you have a 30-year mortgage with a $300,000 principal and 7% interest rate, an extra $500 per month could help you pay off your mortgage in 17 years and four months or 12 years and eight months early, saving nearly $200,000 in interest payments.
Full curtailment
A full curtailment is a method where you pay off your entire mortgage at once, potentially benefiting from a large sum of money from a bonus, inheritance, or investment. While lenders may not allow early payoffs, if permitted, it can eliminate the mortgage balance and years of interest payments.
For example, if you follow the 30-year mortgage with a 4.5% interest rate, you would pay $164,813.42 in interest over the loan’s life. After the first year, you would have paid $3,226.45 toward the principal and $8,933.99 toward interest, leaving you with a balance of $196,773.55.
Mortgage recasting
Mortgage recasting is a middle-ground option between partial curtailment and full curtailment. By making a lump-sum payment towards your balance, the lender will adjust the loan’s amortization schedule to lower your monthly payments. Keep in mind that some lenders may charge a small fee for recasting a mortgage.
Mortgage Refinancing
If you refinance your mortgage, you may lower your interest rate, but you will need to pay closing costs. Recasting could be a good option if interest rates have increased. On the other hand, refinancing might be better if interest rates have decreased, as it can lead to greater savings over time.
How Does Curtailment Affect Mortgage Payments?
The impact of curtailment on your monthly mortgage payment can vary depending on whether you have a fixed-rate or adjustable-rate mortgage (ARM). When calculating curtailment, it’s important to subtract the extra payment from the principal balance, as the lender will continue to charge interest on the remaining balance.
For a clearer understanding of how regular curtailment payments will affect your loan in the long term, consider using Sire Finance’s mortgage calculator.
Fixed-rate
With a fixed-rate loan, your monthly mortgage payment remains consistent. Curtailment allows you to maintain the same monthly payment while reducing the loan term and interest paid over time.
Adjustable-rate mortgage (ARM)
Even with an adjustable-rate mortgage (ARM), adopting a strategy of curtailment can be advantageous. ARMs typically have a fixed lower rate for the initial years before adjustments are made based on market rates.
By reducing your principal balance early on, you can save on interest costs, especially if rates rise after the introductory period ends. This makes curtailment a smart move in managing an ARM effectively.
Benefits of a Mortgage Curtailment
Here are the 4 top benefits of Mortgage Curtailment:
- Reducing your mortgage balance through curtailment can lead to substantial savings on interest costs over time.
- Curtailment allows you to reduce the length of your mortgage, helping you pay off your loan faster.
- A curtailment plan specified in the mortgage agreement can help lower your monthly payments, offering you more financial freedom and flexibility.
- Curtailment payments help you increase your equity in the property by reducing the mortgage balance, allowing you to own a larger stake in your home.
Should You Cutrail Your Mortgage?
Making mortgage curtailment payments can significantly reduce the amount of interest you pay over the life of your loan, ultimately helping you become debt-free sooner.
If you’re considering curtailing your mortgage, Sire Finance can guide you through the process efficiently and effectively. Take the first step towards achieving your financial goals by reaching out to Sire Finance today.
