When you take out a mortgage on a house, your bank is lending you money to buy your property. In exchange, you agree to pay off the entire loan with interest according to a set mortgage schedule. If you get some extra money, you can pay off your mortgage loan earlier using a mortgage curtailment.
There are two kinds of mortgage curtailment payments. A full curtailment completely pays off your mortgage loan. You cut your bank a check for the entire remaining balance on your loan and owe it no more money. A partial curtailment is an extra payment towards your mortgage. While it doesn't pay off your entire mortgage, it reduces the amount of monthly payments needed to finish paying off your loan. You can make multiple partial curtailments throughout the course of your mortgage.
Impact on Payments
When you make a mortgage curtailment, you shorten the length of your mortgage schedule. This extra payment won't reduce your original monthly payment though. Even if you pay your bank some money in advance, you'll still need to keep up with the regular monthly bill.
The longer the term of your loan, the more you'll need to pay the bank in interest. With a mortgage curtailment, you shorten the length of your loan and cut down the amount of interest you need to pay the bank. By paying less in interest, you lower the total cost of your mortgage loan and make your home purchase overall less expensive.
Your bank designed your mortgage loan to make money from interest. If you pay off your mortgage too quickly with curtailments, your bank could charge you a prepayment penalty -- a flat fee you must pay to complete your mortgage contract. These penalties typically are triggered by payoff during the first few years of mortgage. If you've held your mortgage for at least five years, you shouldn't owe any extra money for making a curtailment payment.
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