What is Principal Curtailment in Real Estate?
What is Principal Curtailment in Real Estate?
Principal curtailment in real estate refers to the act of making an extra or “off-schedule” payment directly toward the principal balance of a mortgage loan. This payment is separate from, and in addition to, the borrower’s regularly scheduled monthly mortgage installment. By doing so, the borrower effectively reduces the outstanding principal amount owed, which can yield several key benefits:
- Reduced Interest Costs: Since mortgage interest is generally calculated as a percentage of the principal balance, cutting down the principal earlier results in less interest accruing over the life of the loan.
- Shortened Loan Term: Extra principal payments help pay off the mortgage sooner than the original schedule, potentially shaving years off the term of a 15- or 30-year loan.
- Increased Equity: A curtailment boosts the homeowner’s equity position in the property. This can offer advantages if the borrower decides to refinance, sell, or tap into home equity for financing needs.
- Improved Loan-to-Value Ratio: By lowering the principal, the home’s loan-to-value (LTV) ratio improves, which can be beneficial if the owner wants to eliminate private mortgage insurance (PMI) or negotiate better loan terms during a refinance.
Principal curtailment is a strategic financial move for borrowers who have extra funds and want to reduce their long-term mortgage costs and indebtedness.
