Should You Use a Mortgage Curtailment?

With a mortgage comes many questions, one of which is how to pay off your mortgage faster.

Whether you're a home owner or real estate investor, there is an option that can help you pay your mortgage off quicker: a mortgage curtailment.

What are its rules? How does it work? And most importantly, is it right for you?

We'll answer all these questions in this mortgage curtailment guide.

Understanding Mortgage Curtailment

Mortgage curtailment, also known as a prepayment, refers to the act of making extra principal payments on top of your regular mortgage payments.

By doing so, you can decrease the outstanding balance of your loan, which in turn decreases the amount of interest you pay over the term.

How Does Mortgage Curtailment Work?

Let's say you have a 30-year fixed-rate mortgage with a monthly payment of $1,500.

By making additional payments towards the principal, you can effectively shorten the loan term and save thousands of dollars in interest payments.

For instance, if you make an extra payment of $500 per month, the additional amount will directly reduce the outstanding principal balance. 

As a result, the interest accrued on your mortgage decreases, and more of your monthly payment goes towards paying down the principal.

Over time, this snowball effect can significantly reduce the overall interest paid and accelerate the process of becoming mortgage-free.

The Benefits of Mortgage Curtailment

Interest Savings

One of the most significant advantages of mortgage curtailment is the potential to save on interest.

By reducing the outstanding principal balance, you decrease the amount of interest that accrues over time.

As a result, you can save thousands or even tens of thousands of dollars in interest payments throughout the life of your loan.

Faster Home Ownership

Another compelling benefit of mortgage curtailment is the ability to pay off your mortgage faster.

By making additional principal payments, you can effectively shorten the loan term.

What could have been a 30-year mortgage may be paid off in 20 years or even less, depending on the amount and frequency of the extra payments you make.

Improved Credit Score

A mortgage curtailment can have a positive impact on your credit score. As you reduce your outstanding debt by making extra principal payments, you demonstrate responsible financial behavior, which can result in an improved credit score over time.

Equity Build-Up

Another significant advantage of mortgage curtailment is the accelerated build-up of equity in your home.

Equity is the difference between the market value of your property and the outstanding balance on your mortgage.

By curbing the principal amount owed, you increase your equity stake in the property at a faster rate.

Alternatives to a Mortgage Curtailment

Before you choose on a mortgage curtailment, ask yourself if there are other investing opportunities that might be better off in the long run.

For example, is there another property you could use as an investment property, or a second investment property?

Or, would you rather sink your extra cash into another form of investing, such as stocks or bonds?

Your financial advisor can help you answer all of these questions.

The Bottom Line: Mortgage Curtailment

There you have it: a mortgage curtailment. Not only can it save you a decent amount of money in interest; it can help your credit score and help you earn equity faster.

It's one of many tools for both homeowners and real estate investors alike to make wise money decisions.

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