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About Curtailment
Most people will require a mortgage to purchase their dream home. When you take a mortgage you pay monthly installments and it off at the end of the tenure of your loan.
As a borrower, most of us would like to pay off the mortgage as soon as possible and get relieved from one of the biggest debts we may owe.
There is a way where you can pay off your mortgage before the loan tenure ends. In this post, we will understand what is a mortgage curtailment and how it works in detail.
What Is A Mortgage Curtailment?
Generally, curtailment means reducing something or cutting some portion. A mortgage curtailment is a process in which the borrower pays off a portion of the complete loan ahead of its original schedule.
Usually, all conventional fixed mortgages are amortized as per the tenure of the loan (5, 10, 15, 20, 25, or 30 years).
If you follow this process, you will be paying off your mortgage debt ahead of the original amortization schedule.
How Does A Mortgage Curtailment Work?
When you pay your monthly mortgage payments, the amount is split between the interest and the loan principal.
At the beginning of the mortgage, the interest accrues on all – or most – of the loan balance and the majority of the amount is going towards interest repayment.
As you continue to pay your monthly mortgage payments your principal amount is reduced and so does the accrued interest. Hence, the majority of the amount goes towards principal repayment.
Mortgage curtailment accelerates this process. Along with your monthly mortgage payments, you can also make additional payments to lower your principal loan balance.
Once the principal loan balance is reduced the interest rate charged on the principal balance would be less and hence it could benefit you to save both time and money.
If you use this process wisely, you can save tens of thousands of dollars over the life of your loan and get your home paid off in less time.
Lenders generally make a profit on the interest that they charge the borrowers. By using this process, you are reducing their profit; hence many lenders may not allow the mortgage curtailment beyond a specific amount.
You should check your mortgage documents or speak to your lender to understand if there are any limits set for the additional payments that you can make towards the principal amount.
You might need to have a working strategy to execute this type of financial method.
Make sure you have enough money to cover emergencies, unexpected expenses, and all your bills. It would not make any sense if you are opting for this method and are unable to take care of your regular financial obligations.
What are The Types Of Mortgage Curtailments?
If you are looking to pay off your mortgage quicker, there are two options for mortgage curtailment that you can choose from.
These options depend upon your mortgage terms with your lender and your anticipated financial situation.
1 - Full Curtailment:
In this type, you will pay the entire amount of your mortgage at once. In case you have received a huge bonus or sold one of your investment properties, you can use those funds to pay off your current mortgage and save a huge amount of money on interest.
However, since you would be waiving the interest amount completely, not all lenders would allow this type of payoff.
2 - Partial Curtailment:
In this type, you would not be paying the entire mortgage principal. Instead, you can pay a partial lump-sum amount or an extra monthly amount to curtail your mortgage tenure.
When you chose this option, your monthly mortgage payments remain unchanged and the lender will reduce the tenure and make the correction on the amortization schedule based on the additional amount that you pay towards your principal.
Conclusion
It is one of the most commonly used strategies used by homeowners across the country to pay off their mortgage debt and own their homes outright as soon as possible.
If you are not sure if mortgage curtailment is something that you want to opt for, you can always take a mortgage based on your current qualification and choose this option in the future once you have gained financial strength.
