What is Mortgage Curtailment?
If you were told there is a way to pay off your 30 your mortgage in a much smaller timeframe or let go of your 15-year mortgage in just seven years you would probably jump at the chance to do so.
This is the focus behind mortgage principal curtailment. It is the practice of shortening the length of your mortgage loan by making extra payments.
What is mortgage curtailment?
When a homeowner makes extra payments onto their mortgage they can cut down the entire lifetime of the loan or curtail it. Every time you put an extra amount of money toward the principle of your mortgage you cut down the lifeline of your loan and also save on interest. The quicker you pay off your mortgage the bigger interest savings you will benefit from.
How mortgage curtailment works
This is not a special program that will be offered by your lender that you can sign up for. The lender is not looking to make less money on interest for a home loan. The practice of curtailing your mortgage loan is completely dependent upon the borrower's actions. It can take planning and hard work but it can be done.
It may require some creative budgeting to find extra money to put towards the principal of your home loan but with some hard work it can be done. When it comes to paying off a mortgage in a sooner timeframe even just a little bit counts. Even just an extra hundred dollars a month towards your mortgage payment can make a large difference. Just $100 a month extra paid toward a 30-year fixed rate mortgage can knock off about four years of payments.
But before you consider putting extra money into your mortgage payments you should make sure that this is a healthy choice for your personal financial situation. There are other things in your financial health that should be in a row before making extra payments onto your mortgage principal such as making sure you have a healthy emergency fund and are contributing to retirement income.
The benefits of mortgage principal curtailment
The biggest and most obvious benefit of curtailment is paying off your mortgage loan before the terms of your loan are up. Doing so will save you thousands of dollars in interest over the life of the loan.
Then there is the benefit of having more freedom to do what you wish with your income. When a large chunk of your money is no longer tied up in housing costs you have that to be able to purchase other items.
How can someone make payments and begin mortgage curtailment?
Making an extra payment toward your mortgage loan principal is as simple as paying more on your monthly mortgage statement than the minimum mandatory payment. Before making this extra payment you want to check in with your loan company because some lenders will only accept these extra payments at certain times. Some loans also have prepayment penalties written into them and you don't want to end up paying this.
You also want to make sure that when you're paying this extra amount it is going to the principle of your loan and not into paying interest, escrow, or the following month's payment. None of these items will help you to shorten the length of your loan.
The strategy behind making curtailment payments is that slow and steady wins a race. As payments are made the loan balance will drop lower and lower. This is especially beneficial if you are in the first few years of your loan because most of these first monthly payments go toward interest.
You want to be careful about not recasting your mortgage. This will only prolong your debt. A mortgage recast is when your lender re-amortizes the loan based on the new principal amount after you make a lump sum payment. So if you come into an inheritance or have been given a large monetary gift that you decide to put down on your mortgage principal opt out of the offer for re-amortization.
Reammoritization gives you a new lower payment which sounds promising but these lower payments are stretched out over the rest of the lifetime of your original loan-term meaning you will still be making interest payments and you won't own your home outright sooner. It is not a good idea to recast your mortgage.
Do not opt into a mortgage accelerator program
Some lenders will offer a mortgage accelerator program to help curtail your loan. This is not a monetary benefit to you. It is much easier to accomplish the same goal all on your own by making extra payments.
For more information on purchasing a home in Boston and surrounding areas please contact us anytime.