The curtailment of mortgage payments is a financial maneuver that can relieve you of your mortgage debt ahead of schedule. Even better news is that if you pay down your mortgage debt quicker than expected, you won't have to pay back as much because of the interest you'll save. All you have to do is make payments in addition to your regular mortgage payments, but you can do this on your schedule without a requirement to do so. And you don't have to agree to make a certain amount of additional payments or even meet a minimum requirement.
Mortgage Curtailment Definition
By definition, the word "curtailment" means to shorten or lessen. Applied to a mortgage, curtailment simply means to shorten the life of your loan and reduce the total amount of your mortgage debt. You can do this by paying off the balance of your mortgage ahead of its maturity date — the date when your final payment is due — by making additional payments toward the principal amount.
Reasons to Make Curtailment Payments
Some advocates of not curtailing a mortgage argue that the money you spend to pay down your mortgage early may be better spent elsewhere, such as on a higher-return investment or retirement savings vehicle. However, mortgage curtailment proponents tout its benefits in certain circumstances.
Heading the top of the list is the inevitable loss of income for most people during their retirement years. In fact, the curtailment of income during retirement years may be the prime impetus for making mortgage curtailment payments.
Kiplinger notes other solid reasons for considering mortgage curtailment. For some people, any debt is oppressive. And because a mortgage often represents the largest single debt for many people, getting out from under it can be freeing.
For someone with health problems that may be worsening, reducing or eliminating mortgage debt can untie needed money to pay for medical costs. And if you have an adjustable rate mortgage, paying off mortgage debt in an economy with rising interest rates may make good financial sense.
Curtailment Payments Are Not Extra Payments
Strictly speaking, a mortgage curtailment payment is not an extra payment because it's not a scheduled installment. It's additional money that you pay to your lender toward the balance of the principal amount of your mortgage. This amount doesn't have to equal a regularly scheduled payment, and each mortgage curtailment payment can be a different amount. Your monthly mortgage payments remain the same, however, because mortgage curtailment payments do not replace your regularly scheduled payments.
Mortgage Must Be Current
If you're behind on your mortgage payments, a mortgage curtailment payment isn't a "catch-up payment." In fact, your mortgage must be current before curtailment payments can be applied toward the unpaid principal. If you're current, you'll have a choice of two types of mortgage curtailment payments – a partial curtailment or a total curtailment.
Partial Mortgage Curtailment Payments
You don't have to pay the full balance of your mortgage with a curtailment payment. By making a partial mortgage curtailment payment, you can reduce the outstanding principal balance by the amount of your additional payment.
Total Mortgage Curtailment Payment
You may be in a position to make a total mortgage curtailment, also called a full curtailment. By making a single lump-sum payment, you can satisfy the balance of your loan and retire your mortgage debt.
Applying Mortgage Curtailment Payments
Fannie Mae offers guidelines for how your curtailment payments are applied to the balance of your mortgage. If you include a curtailment payment with your monthly payment, your mortgage servicer must first apply your regularly scheduled monthly payment before applying your curtailment payment. But if you make a curtailment payment during any other time of the month, your servicer must first apply the curtailment amount before applying your next scheduled payment.
If you have an unconventional loan (not backed, for example, by Fannie Mae or Freddie Mac), check with your lender to see if your repayment terms are different. And although most mortgage contracts do not impose any penalties for early payoffs, some mortgages may carry this penalty.