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Principal curtailment refers to making larger monthly payments towards a mortgage with the excess to what is necessary going towards reducing the principal balance left on the loan.
In other words, principal curtailment is a form of prepayment on a loan.
Homeowners who wishes to pay down their home loans faster tend to use this as a simple technique to bring forward the day in which they can live mortgage-free.
The more extra payments are made the faster the home loan is paid down towards full redemption.
However in the case of principal curtailment payment, even though the loan balance reduces, the monthly obligated debt payment remains the same.
This results in a gradual reduction in the term of a mortgage.
For example, if a homeowner is paying $1,000 each month towards the home loan with a remaining term of 240 months, then a sudden windfall might entice him to pay $3,000 in the current month. This would reduce the mortgage term to 238 months, with the monthly payments staying the same.
This also effectively means that the interest payments scheduled in the final 2 payments would be accounted as savings by the borrower.
Something to note for borrowers who intend to practice mortgage curtailment, is to to check with the lender whether this is a default feature of the loan agreement.
Sometimes lenders don’t allow it or the loan repayment account is not set up to accept principal curtailment by default.
It is more than possible for account serving to register the extra payments but take them as payments for the next loan installment that has been deposited early.
When unsure, do contact the lender to ensure that your extra payments go towards principal reduction.
Finally, sometimes refinancing the mortgage can result in even more savings even after factoring in the closing costs. Especially when the current loan has high interest rates from a loan originated many years ago.