What is Principal Curtailment?


A principal curtailment is a mortgage payment sent in by a homeowner before it's due in order to reduce the principal balance on the mortgage. Individual mortgage contracts also come with their own principal curtailment payment terms and conditions. While principal curtailment is generally beneficial it may come with certain tax disadvantages. Because principal curtailment reduces the amount of mortgage interest paid, there's less of it that can be deducted from taxes.

Curtailment versus Refinancing

  • Principal curtailment differs from a refinance. With principal curtailment, the homeowner only pays off a small portion of the mortgage balance early. Refinancing involves complete payoff of a mortgage, with a new loan created. But a sometimes significant principal curtailment payment may be necessary before a homeowner can refinance. In mortgage refinancing, large principal curtailment payments may be required when borrowers haven't built up much home equity as a result of having paid little toward their actual principal balance.

Principal Curtailment Risks

  • Principal curtailment is a risk for the bank that provides a mortgage loan or an investor holding a mortgage-backed security. Early mortgage payoffs can decrease the income an investor receives from a mortgage-backed security, for one. Mortgage lenders also make less revenue in the form of interest payments when borrowers utilize principal curtailment. Many mortgage borrowers, however, don't make use of principal curtailment payments because they require money over and above their stated mortgage payment amounts.

Delays in Curtailment Payments

  • Principal curtailment payments may not be applied to account balances immediately after they're paid. Many mortgage lenders apply principal curtailment payments to borrowers' account balances only once yearly, usually at the end of the year. When lenders only apply principal curtailment payments yearly, for example, borrowers must still send in regular payments amounts until curtailment payments are actually applied. The major benefit to principal curtailment is that it shortens a mortgage loan's repayment term, not that it may reduce regularly owed payment amounts.

Curtailment Assistance Programs

  • Certain government agencies and nonprofit organizations sometimes offer principal curtailment programs to assist homeowners. Michigan, for instance, offers a principal curtailment program that requires mortgage lenders to partially cover principal curtailment payments on eligible mortgages. Principal curtailment programs may be subject to income restrictions, though. And some principal curtailment assistance programs are only available after a specific event occurs, such as a homeowner's loss of employment.

Curtailment and Mortgage Lenders

  • Your mortgage loan must be current in order to utilize principal curtailment. When you send in a principal curtailment, always ensure you provide clear instructions that it be applied to your mortgage's principal balance. Some mortgage lenders also limit the principal curtailment amount that can be applied to a loan in a single transaction. Lenders also generally don't allow borrowers to make principal curtailment payments that equal or exceed their mortgage loan's total balance.


  • Photo Credit AlexRaths/iStock/Getty Images
Promoted By Zergnet



You May Also Like

  • Definition of Mortgage Curtailment

    Definition of Mortgage Curtailment. ... Most Effective Methods for a Mortgage Principal Curtailment; What Is Principal Curtailment? Print this article; Types.

  • What Does Curtailment of Income Mean?

    What Does Curtailment of Income Mean?. "Curtailment of income" is a phrase often used in the mortgage industry. ... What Is Principal...

  • Definition of Commercial Loan Curtailment

    Principal curtailment is a risk for the bank that provides the loan, or an investor who holds a mortgage-backed security. ... What...

  • What Is a Lockbox Payment?

    Economic forces drive many businesses to find new ways to cut costs. Through the implementation of lockbox payments, businesses can reduce bank...

  • Debt Repayment Definition

    Principal curtailment is a risk for the bank that provides the loan, or an investor who holds a mortgage-backed security. ... Bankruptcy...

  • How to Calculate Extra Payments to Mortgages

    Many borrowers want to reduce their mortgage debt by making additional payments on their loans. To do this, make sure the additional...

Related Searches

Is DIY in your DNA? Become part of our maker community.
Submit Your Work!