If you want to pay off your house before your loan term ends, you might be interested in a mortgage curtailment. A "curtailment" is a financial term for an extra payment you make on a loan. According to the latest information from the Bureau of Labor Statistics, 61 percent of U.S. homeowners have a 30-year, fixed-rate mortgage. Many Americans dream of paying off their mortgages early, allowing for increased financial freedom. Before putting your extra money toward a mortgage curtailment, there are a few things you need to know first.
Types of Curtailments
There are two main types of mortgage curtailments: full and partial. A full mortgage curtailment happens when you pay off your mortgage in full before your loan term is up. For example, if you have $25,000 and 10 years left on your mortgage, and you make a one-time payment of $25,000 to eliminate the loan, that would qualify as a full curtailment.
A partial mortgage curtailment, on the other hand, is an extra payment that partially pays off your loan. So, using the previous example, if you have $25,000 and 10 years left on your loan, you might make a partial curtailment payment of $2,000. This will not pay off your loan in its entirety, but it will shave down your balance and shorten the life of your loan.
Impact on Mortgage Payments
By making curtailment payments, you are reducing the interest and overall life of your loan. However, it’s important to understand that making a curtailment payment will not absolve you of paying your regularly scheduled mortgage bill. Your mortgage should be paid each month in full, regardless of curtailments. For instance, let’s say your mortgage bill costs $500 and comes due on the first of each month. On the last week of April, you decide to use your tax refund to make a partial curtailment payment of $2,000. You are still responsible for paying your mortgage payment of $500 on May 1. Making your regularly scheduled mortgage payments will keep you in good standing with your loan provider.
How to Make a Curtailment Payment
If you want to make a curtailment payment to reduce the life of your loan, first you should look into your loan agreement. This should have information about making extra payments. Large companies like Wells Fargo will allow you to make curtailment payments online at any time. If online payment isn’t an option and you usually pay your mortgage by check, it’s recommended that you make a note in the memo section explaining the purpose of your payment. You should also include your loan number so your company knows to which account the curtailment is being applied. If you’re unsure of how to proceed, call your lender for more details.
Chelsea Levinson earned her B.S. in Business from Fordham University and her J.D. from Cardozo. She has been writing professionally for more than ten years. She has created personal finance content for Bank of America, H&R Block, Huffington Post and more.