What if there was a way to get rid of your 30-year mortgage in 20 years? Or dump your 15-year mortgage in seven years? You’d probably say, “Sign me up!”
Well, that’s what mortgage principal curtailment is all about. Mortgage principal curtailment is shortening the length of your loan by making extra mortgage payments.
Curtailment is simply a fancy word for shortening the length of something—in this case, your mortgage.
What Does Mortgage Curtailment Mean?
When you make extra payments on your mortgage, you shorten (or curtail) the length of your loan. Each time you put extra money toward the principal balance of your mortgage, you shave time and interest off your loan. And the quicker you can escape your mortgage, the better.
How Does Mortgage Curtailment Work?
You can’t call your mortgage company and ask them to sign you up for curtailment. It doesn’t work that way. Curtailing your loan is totally up to you, and it takes planning and hard work to figure out how to put extra money toward your mortgage.
Seriously, extra money? Who has any of that?
But when it comes to paying off your mortgage sooner, every little bit counts. Even something as simple as brown-bagging it for lunch instead of eating at a restaurant can save you up to $100 a month that can go toward your mortgage. You might think that won’t make a dent in your debt, but $100 extra a month can knock about four years off your 30-year mortgage.
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And if you find another $100 a month to put toward your mortgage, you could curtail the length by almost seven years.
But before you even consider making extra house payments, you need to make sure your financial house is in order. After you’ve paid off all your debt except your house, saved 3–6 months of expenses for a fully funded emergency fund, and started investing 15% of your income for retirement—then you can start making extra payments on your house.
What Are the Benefits of Curtailment?
Going through life chained to a 30-year mortgage is no fun. The huge benefit of curtailment is that you can cut years off your mortgage. On top of that, paying off your home early saves you thousands of dollars in interest over the life of your loan.
Can you imagine what life would be like if you didn’t have a monthly mortgage payment? It’d be pretty sweet, right? You’d have extra cash in your budget and peace of mind knowing your home is 100% yours. The grass feels different under your feet when your home is paid off.
How Do You Make Curtailment Payments?
Making a curtailment payment is as simple as submitting a payment online or cutting a check to your mortgage company. But make sure to check with your mortgage company before you start making extra payments. Some only accept extra payments at certain times or might even charge prepayment penalties (boo!).
When you make an extra payment, your mortgage company should give you the option of applying it to your loan’s principal, interest, escrow or the following month’s payment. Make sure you apply it to the principal. Making a payment to interest or escrow won’t shorten the length of your loan.
With curtailment, slow and steady wins the race. As you make extra payments month after month, you’ll start to see your loan balance drop lower and lower. Listen, every little bit helps and can knock years off your loan—especially if you’re a new homeowner. That’s because most of your monthly payment goes toward interest in the first few years of your loan.
And if you ever get some money unexpectedly—maybe from an inheritance or a bonus at work—you can make lump-sum payments on your mortgage to help you reach your goal even faster.
But beware of any offers to recast your mortgage—it’ll only keep you in debt! A mortgage recast is when your mortgage company reamortizes your loan based on the new principal amount after you make a lump-sum payment. To put that in plain English, they subtract your lump-sum payment from your loan balance, then stretch out the payments over the rest of the original loan term. You’ll have a lower monthly payment, but it won’t shorten the length of your loan.
So, don’t recast your mortgage. Keep paying your normal monthly payments plus any extra payments so you can get rid of your mortgage as quickly as possible.
Some mortgage companies offer a fancy-schmancy mortgage accelerator program to help you curtail your loan. Don’t waste your money on that. You can accomplish the same goal all by yourself.
Let’s look at an example. Say you just got a 30-year loan for $300,000 with a 5% interest rate. Over the next 30 years, you’ll pay almost $280,000 in interest. But if you pay an extra $400 a month, you can knock 10 years off your loan and save more than $109,000 in interest.
Side note: We recommend 15-year fixed-rate mortgages because you pay way less in interest over the life of the loan. For example, the total interest for a 15-year loan with the same home price and interest rate as the example above is $127,000. So, depending on your current interest rate, refinancing a 30-year loan to a 15-year loan also could save you a bunch of cash.
Want to plug in your own numbers and see how increasing your monthly payment can shorten your mortgage term? Check out our mortgage payoff calculator.
What Are the Types of Curtailment Payments?
There are two basic types of curtailments: full and partial.
A full curtailment is when you pay off your entire mortgage all at once with a big pile of cash. Most of us won’t be in a position to do that (don’t count on a long-lost aunt leaving you a million bucks).
A partial curtailment is paying extra on your mortgage whenever you can. You might choose to add some money to your monthly payment or drop a lump sum on the balance whenever you have extra cash.
Making bi-weekly mortgage payments instead of monthly payments is a cool way to curtail your mortgage. To do this, you pay 26 half-size payments a year, which is the same as making 13 full-size payments. That one extra payment per year could cut four years off a 30-year loan, depending on the interest rate.
And like we said before, the sooner you can pay off your home, the better.
- Mortgage principal curtailment is shortening the length of your loan by making extra mortgage payments.
- It’s up to you to find room in your budget to make extra payments.
- An extra monthly payment of just $100 can take up to four years off the length of your loan—plus thousands of dollars in interest.
- Always check with your mortgage company before you start sending extra payments.
Find a Home Loan to Hit Your Goals
Listen, paying off your home is a big goal. If you want to refinance to a mortgage you can pay off fast, talk to our friends at Churchill Mortgage. They’re a RamseyTrusted provide, and the home loan specialists at Churchill Mortgage show you the true cost—and savings—of each loan option. They coach you to make the best decision based on your budget and goals.