Posted on: 11th Jul, 2009 10:36am
Principal curtailment refers to making extra payments towards a mortgage debt to pay it off faster. The additional payments are applied towards the principal balance on the loan. The more extra payments you make, the faster the principal balance on the mortgage reduces. This helps you save a lot of money in interest payments over the entire life of the loan.
Principal curtailment - An example
Let's say,
The principal balance on the mortgage = $100,000
The term of the loan = 30 years
Interest rate = 5%
The monthly payments on the loan = $536.82 or $537 (approx.)[Using the FRM Calculator].
The number of payments it takes to pay off the entire loan = 12 x 30 = 360
Now, let's assume;
The extra payments towards principal = $100 per month.
The total money saved in interest over the life of the loan = $30,531.66. [Using the Mortgage Payoff Calculator]
The number of payments it will take to repay the loan = 256.
So, with an extra payment of $100 per month, the entire mortgage will be paid off in (256/12) or 21 years 4 months. This means it will take you almost 8 years and 8 months less than the scheduled time (30 years) to get rid of the mortgage liability.
The principal balance on the mortgage = $100,000
The term of the loan = 30 years
Interest rate = 5%
The monthly payments on the loan = $536.82 or $537 (approx.)[Using the FRM Calculator].
The number of payments it takes to pay off the entire loan = 12 x 30 = 360
Now, let's assume;
The extra payments towards principal = $100 per month.
The total money saved in interest over the life of the loan = $30,531.66. [Using the Mortgage Payoff Calculator]
The number of payments it will take to repay the loan = 256.
So, with an extra payment of $100 per month, the entire mortgage will be paid off in (256/12) or 21 years 4 months. This means it will take you almost 8 years and 8 months less than the scheduled time (30 years) to get rid of the mortgage liability.
Does principal curtailment reduce monthly payments?
Principal curtailment reduces the principal balance on the loan. It does not lower the monthly payments. But when you make extra payments, the principal balance gets reduced quickly, meaning an early payoff and savings in total amount of interest over the life of the loan.
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My friend's mortgage statement had a line item for principal curtailment - we're not sure what it is.
which is better to pay into the principal or escrow to pay off the mortgage faster?
To Confused: you certainly hit that nail on the head! Your escrow account is only used for payments to real estate tax, hazard insurance and similar items. Thus, it is of no benefit to you to "pay into" the escrow. By all means, if you plan to pay extra amounts, have it applied directly to the principal balance, as that will reduce your interest costs and pay the loan off quicker.
As for UO, I suppose it will depend on the amount of money you owe on the condo, as well as what the interest rate is on your current HELOC. Of course, what limitations exist on the HELOC are also very important.
That being said, with interest rates at record lows these days, it might behoove you to look into an ordinary fixed rate mortgage loan. Keep in mind that condos are looked at more critically than other types of property and you won't get the absolute best rate available.
That being said, with interest rates at record lows these days, it might behoove you to look into an ordinary fixed rate mortgage loan. Keep in mind that condos are looked at more critically than other types of property and you won't get the absolute best rate available.
Why did my mortgage bank apply the extra payments I made in 3 years($5,300.00) to the PAYOFF amount and not the principal?
Principal curtailments would definitely make a difference in your payoff amount, so I'm not quite certain I understand what took place here. What gives you the impression that you've suffered?
I send extra payment to my lender to be used on my principal but they aply it as a regular payment then i complain and they credit it back to my principal,i have a clause that it says that any extra will be used for my principal ,however they seem to ignore it untill i call them to complain is there a law or agency where i can file a complain Im tired of this people. thanks.
Screenname, it appears that they lack understanding. Your mortgage documents (originals) will spell out who their supervisory agency is - you could contact them, but don't expect a lot. I don't suspect that this sort of matter is looked at as a major priority by anyone other than you and other consumers in the same boat.
i am refinancing, and my broker has a $1,100 line item called principal curtailment. i understand what a curtailment does, but i have never seen a mandatory curtailment in a hud when i refinance. i am told this curtailment will be applied against the loan when the account is set-up and my principal will be $1,110 lower, why is this necessary? am i getting taken? is the broker just trying to get me to pay his fees to the lender? thanks in advance.
Even I haven't seen a mandatory curtailment!! You should clarify the whole matter with the broker/lender and then sign on the dotted lines.
My statement shows extra payments paid, but it is not applying directly to principle as noted in the definition. So my lender shows that I paid 1 month principle and 1 month interest. I was not paying a month ahead I wanted to reduce the principtle. Is this right?
Hi jec,
This is something your lender will be able to clarify. You should contact your lender and ask him to explain the whole matter and let him know that you want to reduce your principal balance by paying extra money toward the principal amount. This will help you resolve the matter.
Thanks
This is something your lender will be able to clarify. You should contact your lender and ask him to explain the whole matter and let him know that you want to reduce your principal balance by paying extra money toward the principal amount. This will help you resolve the matter.
Thanks
why did my bank take $73.92 out of my checking account for a principal curtailment,if i did not ask or authorize? We have been living in our house for 2 years, this is the first time this has happened. I did not even know what a principal curtailment was until i googled it. Thanks
Hi coco,
You should contact your lender and ask for an explanation regarding this matter. It is the lender who will be able to let you know as to why they deducted the money from your account.
Thanks.
Jerry
You should contact your lender and ask for an explanation regarding this matter. It is the lender who will be able to let you know as to why they deducted the money from your account.
Thanks.
Jerry