Interest Rate Differential

Interest Rate Differentials (IRD)


Often a client needs an “idea” of how much their existing mortgage penalty might be before thye decide to refinance or do an “early switch” with pre-payment penalty.

If the penalty is based on a rate differential, here is a BASIC calculation to figure out a close amount…..

Based on a:

$200,000 with 3 years remaining on a 5 year term of 5.70%....

…because there are 3 years remaining, the current 3 year rate is used to calculate the differential.

If the lenders current 3 year rate is 4%, there is a difference of 1.7%. Because there’s still 3 years left, the principal is also multiplied by 3

$200,000 x 1.7% x 3 = $10,200 penalty

(remaining principle) (Difference btw rates) (# yrs remaining)

**This is an estimate and will change every time rates change. If the differential increases, the penalty will also increase.

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