Bill Shock

Understanding how to calculate a mortgage payout penalty can help you decide whether or not it’s wise to go that route.

There are two types of mortgage payout penalties. The first is Interest Rate Differential, or IRD. The second is three months’ interest. If mortgage rates are lower than when you got your mortgage, the lender will usually charge IRD. If rates are higher than when you got your mortgage, the lender will usually charge a three-month interest penalty.

When calculating a penalty, you need to know your current mortgage rate, the lender’s posted rate on the term closest to the remaining time on your mortgage term and your mortgage balance.

As an example, let’s use the following conditions: mortgage balance today of $200,000; interest rate at the time the mortgage closed 5%; three years left in the term; three-year posted rate is 3%.

Calculating the IRD:

Mortgage balance x (difference between mortgage rates) x remaining years in term = payout penalty
$200,000 x (0.05 – 0.03) x 3 = $12,000

Calculating Three Months’ Interest Penalty:

Mortgage balance x 3 months’ interest = penalty
$200,000 x (0.05 x 3/12) = $2,500

These calculations are to be used as a guide only. Your mortgage lender may use slightly different values. Please speak with your mortgage professional to confirm actual penalties.