How Mortgage Principal Curtailment Works

Mortgage curtailment gets you debt-free faster.

Mortgage curtailment gets you debt-free faster.

Mortgage principal curtailment is a complicated way of saying that you owe less on your home loan. Principal curtailment can happen when you pay extra every month or by periodically sending in large extra payments. Curtailments can also happen as part of a loan modification, where the terms of your loan change to make it easier for you to pay. They can also happen to correct lender errors or closing matters.

Paying Extra Every Month

One of the simplest ways to curtail your principal is to add a little bit of money to your monthly mortgage payment. Given that you're paying more interest than principal for much of the life of your mortgage, even a little bit extra makes a real difference. For instance, if you have a $125,000, 30-year mortgage at 4.75 percent, your monthly payment is $652.06. Rounding it up to $700 saves almost 50 payments -- taking more than four years off your loan's life. Paying $752.06 gets it paid off in less than 23 years, and adding an extra $200 per month to get the payment to $852.06 will turn your 30-year mortgage into an 18-year, four-month mortgage.

Periodic Lump Sums

Instead of paying extra every month, you can also curtail your mortgage's principal balance by sending a large lump-sum payment when you have it. For instance, you may choose to use a bonus at work or a tax refund to reduce your mortgage balance. Doing this will also save time and get your mortgage paid off more quickly just like making larger-than-required monthly payments.

Loan Recasting

If you can afford to make a large payment of principal, your lender might let you recast your mortgage. Normally, when you pay your loan down, your calculated monthly payment doesn't change. This is why extra payments make your loan pay off more quickly. When you recast your loan, though, the lender recalculates your payments based on your new, lower balance. This won't shorten the time you spend paying your loan, but it will lower the monthly payments that you'll have to make for its remaining life.

Distressed Mortgage Principal Curtailment

A principal curtailment can also come about as part of a mortgage modification process. When this happens, a lender, a housing agency or both agree to lower the loan's balance to make it easier for a homeowner in trouble to qualify for a loan modification. These curtailments are typically limited in scope and availability.

Lender Curtailments

Sometimes lenders curtail principal balances. This is typically done to fix problems that arise when a loan closes. For instance, if a lender finds out that it charged too much in closing fees, it may choose to apply the refund as a curtailment. Curtailments also can happen when loans close with limitations on how much cash back you can receive. If, for some reason, the costs come in below the estimate and you are scheduled for too much cash back, the lender can take a portion of that money and apply it to your balance. This way, you get the money that you're supposed to, but some of it is applied to your loan balance.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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