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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: This method is typically used by mortgage finance companies, virtual lenders, and non-bank mortgage lenders to calculate fixed mortgage rate penalties.

Discounted Interest Rate Differential (IRD) Penalty: This method of calculation is 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: This method of calculation is 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:

Term & Posted 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 RateFull-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
[Mortgage Balance x (Your Rate – Your Lender Current Rate that Matches Your Remaining Term)] / 12 x Remaining Term3 years, which is equal to 36 months
Your Lender’s Current Rate 3.5%
Mortgage Type and RateFull-feature fixed mortgage rate at 4% 
Calculation[Mortgage Balance x (Your Rate – Your Lender’s Current Rate that Matches Your Remaining Term)] / 12 x Remaining Term
Calculated Penalty[$300,000 x (3.5% – 3%)] / 12 x 36 = $4,500
On fixed-rate mortgages, a lender typically charges the greater of 3 months’ interest or the interest rate differential penalty.

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 Discount1.7%
Mortgage Type and RateFull-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
On fixed-rate mortgages, a lender will typically charge the greater of the 3 months’ interest or the interest rate differential penalty.

 Percentage of Mortgage Balance

Mortgage Balance at Payout$300,000
Mortgage Type and Rate low-feature variable mortgage rate at 2.9% 
CalculationMortgage Balance  x  Rate  
Calculated Penalty$300,000 x 2.9%  = $8,700
This penalty is straightforward for variable-rate mortgages; however, for fixed-rate mortgages, the lender will typically charge the greater of this, three months’ interest, or IRD.

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 the 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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