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What is mortgage curtailment? Benefits and considerations

Mortgage curtailment is a big term that means making extra payments on a mortgage loan. These extra payments can reduce long-term interest costs and saves money.

One or two extra payments over a 30-year mortgage won't save all that much, but making extra payments on a regular basis can shave years off a mortgage and save thousands of dollars in interest.

Curtailment is a powerful strategy because it targets the loan's principal balance. 

What is curtailment on a mortgage, and how does it work?

Fixed rate mortgages come with a pre-set payment schedule. A 30-year loan, for example, requires 360 scheduled monthly payments that, collectively, repay all of the loan's principal and interest. 

Mortgage curtailment lets borrowers jump ahead in this schedule, but curtailment saves more than time. It also saves money by giving the loan servicer less time to charge interest. 

Plus, extra payments have more power to reduce debt than regular payments.

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Why extra payments save more money

Regular payments include principal, interest, and extra charges for homeowners insurance and property taxes. So when a homeowner makes a regular payment, only a portion of the payment reduces the loan balance.

This is especially true early in the loan's term when only a small slice of a regular payment gets paid to principal. A loan's amortization schedule places a lot more of each payment toward interest during the first years of the loan term.

When borrowers make extra payments, the entire payment can go directly onto the loan's principal, reducing the loan's balance. Borrowers must still make their regular payments, but once that obligation is met, they can pay extra onto the loan's principal balance.

It's best to check with the loan servicer before starting extra payments to make sure the money will go onto the loan's principal. Otherwise, the extra payment could be credited as the next month's regular payment. 

Mortgage curtailment example

Let's consider a 30-year, $200,000 mortgage with a 4 percent interest rate. Following the 30-year schedule requires paying about $143,739 in interest over the loan's lifetime. By adding only $100 each month toward principal, this borrower could shorten the loan term by about 4-1/2 years and save nearly $26,852 in interest payments.

For a larger mortgage, a $350,000 loan at 5 percent interest, for example, that same $100 monthly payment would save over $40,000 in interest payments.

These numbers show how even modest curtailment efforts can save a lot of money. Borrowers with higher rates can save even more. Learn more about paying off your mortgage faster.

Types of curtailment

Mortgage curtailment comes in two distinct forms, each serving different goals. Both types reduce total interest paid, but they work differently depending on your available funds and timeline.

Partial curtailment

Partial curtailment makes extra payments toward mortgage principal without paying off the entire balance. These extra payments, whether made monthly, occasionally, or as lump sum payments, reduce the principal faster than scheduled.

The regular monthly payment amount stays the same, but the loan's amortization schedule adjusts to reflect the lower outstanding balance, ultimately shortening the loan term.

Consider a 30-year, $300,000 mortgage with a 6.5 percent interest rate and monthly payments of $1,896. Adding just $200 monthly toward principal could cut about six years off your loan term and save over $80,000 in interest payments.

Even smaller amounts make a difference: An extra $50 monthly still saves thousands over time.

Full curtailment

Full curtailment means paying off your entire remaining mortgage balance at once. This approach immediately eliminates the debt and stops all future interest from accruing. While this requires significant available cash, it provides the satisfaction of complete mortgage freedom.

Full curtailment typically occurs after major financial events like receiving an inheritance, work bonus, or proceeds from selling another property.

Lenders could impose prepayment penalties for early loan payoff, so reviewing your loan terms beforehand helps you calculate whether the savings outweigh any fees. Newer mortgages typically don't charge prepayment penalties. 

Also, borrowers may want to check with a financial advisor before a full curtailment. The cash needed to pay off an entire mortgage may be more useful if invested elsewhere. 

Benefits of mortgage curtailment payment

Making extra mortgage payments to achieve principal curtailment saves more than time. 

Here are the key advantages of mortgage curtailment:

• Interest savings: Even modest additional payments cut thousands from your total loan cost. The earlier you start, the greater the savings.
• Shortened loan term: Your mortgage could be completed in 22 to 25 years instead of 30 with regular additional principal payments, without changing your required monthly payment.
• Accelerated equity building: As you decrease the outstanding balance, your ownership stake increases proportionally. This growing equity provides options for home equity loans or lines of credit when needed for renovations or other expenses.
• Reduced financial stress: Many homeowners report satisfaction from watching their debt decrease faster than scheduled, creating greater peace of mind.
• No extra costs: Unlike a refinance, which requires closing costs, curtailment can cut into interest without big upfront costs.
• No commitment: Short on money this year? It's OK to take a year off from making extra payments so long as the regular payments stay up to date.

Despite these benefits, curtailment may not be for everyone. Borrowers should consider saving up an emergency fund to cover home repairs before paying extra on the mortgage, for example.

Also, homeowners with lots of high-interest credit card debt may want to consider paying that off before making extra mortgage payments. 

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How to do a mortgage curtailment

Ready to start making extra principal payments? Contact your mortgage servicer first to understand their specific curtailment policies, as requirements vary between lenders.

If you use your loan servicer's app or website, you may see a link specifically set up for making extra payments onto principal. If you pay by mail or over the phone, make sure you know where the extra payment will go before making it.

Unless you clarify, some lenders may apply extra payments to the loan's interest which ultimately saves less money than paying onto principal. 

Remember that curtailment payments won't replace your regular monthly mortgage payments. They work alongside regular payments to accelerate your path to mortgage freedom. 

Mortgage curtailment considerations

Before committing to mortgage curtailment, several key factors deserve some attention: 

Financial stability comes first

Even if you paid down a principal balance by thousands of dollars one month, the next month's regular mortgage paymentwould still be due as usual, and it won't be any smaller.

Homeowners shouldn't risk their ability to pay their current monthly bills in order to save on mortgage interest in the future. 

Instead, make sure you can afford the extra monthly payments without sacrificing present-day needs.

Consider the opportunity costs

Money used for mortgage curtailment can't be used elsewhere. That money might earn higher returns if invested in stocks, retirement accounts, or other assets.

Borrowers should weigh mortgage interest savings against potential investment earnings carefully. For example, if your mortgage rate is 5 percent but you could earn 8 percent in the stock market, curtailment may not be your best financial move.

Homeowners should address these types of questions with a financial advisor. This article does not provide individualized investment advice. 

Tax implications require attention

If you itemize income tax deductions, reducing mortgage interest through curtailment will also reduce tax deductions. For homeowners who take the standard deduction ($14,600 single/$29,200 married filing jointly), this won't matter.

The decision should depend on your complete financial picture, risk tolerance, and long-term goals. Curtailment works best when you have stable income, adequate emergency funds, and your mortgage interest rate exceeds potential investment returns.

Mortgage curtailment alternatives

Curtailment suits homeowners who want to reduce debt without changing their current loan, but other strategies might better fit your financial situation. Here are the main alternatives worth considering:

Refinancing

Refinancing offers a popular path when interest rates drop below your current rate. You can secure a lower rate or switch to a shorter term loan, reducing total interest without making extra payments. This approach works especially well if rates have fallen significantly since you obtained your original mortgage.

Mortgage recasting

Mortgage recasting creates a middle ground between curtailment and refinancing. A recast can happen after the borrowermakes a large lump sum payment toward the principal. The lender will then recalculate (or recast) monthly paymentsbased on the new balance while keeping your original interest rate and term.

This reduces the loan's required monthly payment amount immediately without paying refinancing costs.

Eliminating mortgage insurance

Homeowners with less than 20 percent equity might focus first on eliminating private mortgage insurance (PMI). PMI is an extra charge paid each month by the borrower to protect the lender.

Once a conventional loan balance falls to 80 percent of the home's value, the lender no longer needs PMI. It can be canceled, saving the borrower hundreds of dollars per month. 

Principal curtailment, combined with increasing the home's value, can eliminate PMI faster.

Most homeowners with FHA loans pay mortgage insurance premiums throughout the life of the loan unless they refinanceinto a conventional loan. 

Better's full array of refinance loans can help borrowers eliminate mortgage insurance.

Mortgage curtailment FAQs

To curtail or not to curtail? These FAQs may help answer that question:

What's the difference between curtailment and prepayment?

You may hear these terms used interchangeably, but they have distinct meanings. 

Curtailment precisely targets principal reduction, while prepayment might apply to different loan components or even to future scheduled payments. All curtailment payments qualify as prepayments, but not all prepayments function as principal curtailment.

If you're not sure where your extra payments are going, be sure to ask your loan servicer before making the payment.

How much money could I save with mortgage curtailment?

Savings depend on your loan amount, interest rate, and how frequently you make additional payments. Adding $100 monthly to a 30-year, $350,000 loan with 5 percent interest saves approximately $40,000 in interest payments. A $200,000 loan at 4 percent interest with an extra $100 monthly shortens the term by 4-1/2 years, saving nearly $26,852.

Your specific savings will vary based on these factors, so use a refinance calculator to see potential benefits for your situation.

What does posted to curtailment mean?

This phrase indicates your curtailment payment has been received and successfully applied to your mortgage's principal balance. When you see this notation, it confirms the payment reduced what you owe beyond the standard amortization schedule, effectively accelerating your loan payoff timeline.

Mortgage curtailment is a personal choice

Mortgage curtailment speeds up mortgage repayment. Along the way it saves money on interest and builds home equityfaster.

Building home equity faster lets homeowners leverage the power of their equity through HELOCs and home equity loans sooner.

There's no one-size-fits-all way to curtail a mortgage. Instead, borrowers should make decisions based on their unique personal finances.

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