Overview

When you make a principal curtailment (a one‑time, extra payment that goes straight to principal), the loan’s unpaid principal balance (UPB) drops immediately. Because interest on most loans is calculated on the remaining principal, a smaller UPB means less interest accrues going forward and the amortization schedule changes to reflect the new balance.

How the amortization actually changes

  • Shorter term (same monthly payment): If you keep the monthly payment the same after the curtailment, a larger share of each payment goes to principal. That accelerates payoff and shortens the remaining term.
  • Lower monthly payment (same term): Some lenders will re‑amortize or recast the loan so the remaining balance is spread over the original remaining term, lowering your monthly payment.
  • Hybrid outcome: Lenders sometimes offer a partial payment reduction plus a modest term cut.

Timing and mechanics

  • Recalculation timing: Most servicers apply the curtailment immediately to principal, but changes to your scheduled payment or amortization typically take effect only after the next statement or after you request a formal recast/reamortization. Check with your servicer for the exact timing (Consumer Financial Protection Bureau explains how extra payments are handled: https://www.consumerfinance.gov/ask-cfpb/can-i-make-extra-payments-on-my-mortgage-without-penalty-en-1159/).
  • Fees and paperwork: Some lenders charge a recast fee or require a re‑amortization application. Fees are generally much smaller than refinance costs, but policies differ by lender and loan type.

Common lender responses

  • Automatic application to principal: Extra payments are usually applied to principal if you instruct the servicer to do so.
  • Recast/reamortization option: Recasting recalculates your amortization using the new balance and the remaining term; it often requires a request and sometimes a fee. See our guide on how mortgage recasting changes your schedule for details.

Real‑world numbers (short example)

Imagine a 30‑year, $300,000 fixed mortgage at 4.5% with a 20‑year remaining term and a monthly payment of $1,900. A $30,000 curtailment reduces the UPB to $270,000. If you keep the $1,900 payment, the loan pays off years earlier and you save tens of thousands in interest. If you ask the lender to re‑amortize, your new payment might fall substantially while the payoff date remains the same.

Why interest savings happen

Interest is charged on principal. Lower principal means less interest accrues each period. Over multi‑decade loans this can translate into large savings; the earlier you curtail, the greater the benefit.

Special considerations

  • Adjustable‑rate mortgages (ARMs): A curtailment reduces interest costs while the rate is fixed but won’t stop a future rate reset on an ARM. When the rate adjusts, your remaining interest will be calculated on the lower UPB.
  • Prepayment penalties and commercial loans: Some mortgages or commercial loans include prepayment penalties or restrictions on curtailments. Always confirm terms before paying a large lump sum.
  • Tax effects: Paying principal does not create taxable income. It does reduce future mortgage interest, which may lower the mortgage interest deduction if you itemize. Consult the IRS or a tax advisor about deductibility and current rules.

Practical steps to take

  1. Confirm payment application: Tell your servicer you want any extra funds applied to principal and get written confirmation.
  2. Ask about recast/reamortization options: Request the lender’s process, fees, and documentation needed to lower payments or shorten term.
  3. Run the numbers: Use an amortization calculator or ask your lender for an updated amortization schedule showing both options (lower payment vs shortened term). Our amortization schedule guide can help you read those results.
  4. Preserve an emergency fund: Don’t deplete cash reserves just to curtail—compare interest saved against liquidity needs.

Professional tips

  • Prioritize high‑rate debt first: If you have higher‑interest consumer debt, paying that down usually yields better returns than prepaying a low‑rate mortgage.
  • Consider refinancing vs. curtailment: If rates have fallen significantly, refinancing may offer a lower rate plus term change; compare total costs.
  • Document everything: Keep records of the curtailment, your servicer’s confirmation, and any revised amortization schedule.

Common mistakes

  • Forgetting to instruct the servicer to apply funds to principal, which can result in funds being posted to future payments instead.
  • Not checking for prepayment penalties or recast fees.
  • Using all liquid savings to curtail principal and leaving no emergency cushion.

Internal resources

Bottom line

A principal curtailment reduces the unpaid principal balance and changes amortization in a way that saves interest and either lowers payments or shortens the loan. Policies and options vary by lender and loan type, so confirm how your servicer will apply the payment and whether a formal recast or re‑amortization is available.

Professional disclaimer

This article is educational and not individualized financial or tax advice. Consult your loan servicer and a qualified tax or financial advisor for guidance that applies to your situation. For consumer guidance about extra mortgage payments, see the CFPB (https://www.consumerfinance.gov).

Authoritative sources