Mortgage Penalty Calculator
Breaking your mortgage early? Calculate your penalty to determine what’s right for you.
CALCULATING YOUR PREPAYMENT PENALTY
3 Months Interest Penalty – This method is commonly used for variable or adjustable mortgage rate penalty calculations.
Standard Interest Rate Differential (IRD) Penalty – Used by mortgage finance companies, virtual lenders and non-bank mortgage lenders to calculate fixed mortgage rate penalties. This method is typically used for fixed mortgage rate penalty calculation.
Discounted Interest Rate Differential (IRD) Penalty – A method of calculation most commonly used by banks and credit unions. Instead of comparing with their current rate that matches your remaining term as in the standard IRD calculation, the lender will use their posted rate that most closely matches your remaining term less the original discount you got off the posted rate at the start of your term. Typically short-term fixed-rate mortgages are discounted less than long-term mortgage rates, making this method the most unfair penalty calculation.
Percentage of Mortgage Balance – A method of calculation most commonly used on low-rate or low-feature mortgage products by all types of lenders. This method will calculate the penalty as a percentage of the whole remaining balance at payout. This penalty is straightforward for variable-rate mortgages, however for fixed-rate mortgages, the lender will typically charge the greater of this, 3 months interest or IRD.
Prime rate:
Break Your Mortgage and Not Your Bank Account
There are 4 ways to calculate your mortgage prepayment penalty.
3 Months Interest Penalty
| Mortgage Balance at Payout | $300,000 |
| Mortgage Type and Rate | Full-feature variable mortgage rate at 4% |
| Calculation | (Mortgage Balance x Rate) / 12 x 3 |
| Calculated Penalty | ($300,000 x 4.00%) / 12 x 3 = $3,000 |
Standard Interest Rate Differential (IRD) Penalty
| Mortgage Balance at Payout | $300,000 |
| Your Remaining Term (in Months) | 3 years, which is equal to 36 months |
| Your Lender’s Current Rate | 3.5% |
| Mortgage Type and Rate | Full-feature fixed mortgage rate at 4% |
| Calculation | [Mortgage Balance x (Your Rate – Your Lenders Current Rate that Matches Your Remaining Term)] / 12 x Remaining Term |
| Calculated Penalty | [$300,000 x (3.5% – 3%)] / 12 x 36 = $4,500 |
Discounted Interest Rate Differential (IRD) Penalty
| Mortgage Balance at Payout | $300,000 |
| Your Remaining Term (in Months) | 3 years, which is equal to 36 months |
| Your Lender’s Posted Rate | 3.5% |
| Your Original Discount | 1.7% |
| Mortgage Type and Rate | Full-feature fixed mortgage rate at 4% |
| Calculation | [Mortgage Balance x [Your Rate – (Your Lenders Posted Rate that Matches Your Remaining Term – Your Original Discount)]] / 12 x Remaining Term |
| Calculated Penalty | [$300,000 x [4% – (3.5% – 1.7%)]] / 12 x 36 = $19,800 |
Percentage of Mortgage Balance
| Mortgage Balance at Payout | $300,000 |
| Mortgage Type and Rate | low-feature variable mortgage rate at 2.9% |
| Calculation | Mortgage Balance x Rate |
| Calculated Penalty | $300,000 x 2.9% = $8,700 |
Your calculated IRD penalty has increased from $4,500 to $19,800 because the lender uses the discounted rate IRD calculation rather than the standard IRD calculation. Each borrower’s financial situation and mortgage needs are unique which is why it is important to consider mortgage products based on your future plans rather than interest rate alone. At nesto, we recommend that you speak with our mortgage experts to fully understand your mortgage options before moving ahead with your solution.
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